UK Mortgages Explained

Mortgages are in practice, simply secured loans which use a property as collateral for the property loan in question.

They come in many forms in the UK ranging from traditional first charge mortgages, to more specialised second charge options, all the way through to some quite niche options like self-build mortgages and more besides.

What Is a Mortgage?

A mortgage is a loan used to buy a property. There are various types of mortgage, which impact the interest you pay. Specialist mortgages are available for first-time buyers or for purchasing a home to rent out.

When it comes to understanding first charge mortgages, it is key that you are aware of the fundamental aspects of what is in practice, a large financial commitment, usually for many years to come.

Continue reading to get all the nitty-gritty details

Looking for other information on Mortgages? This guide has info on 'Repayment Mortgages'. We have also writen extensively about:

• - Interest-only Mortgage guide
• - Fixed Rate mortgage guide
• - Standard variable rate (SVR) Mortgage
• - Discounted rate mortgage guide
• - Tracker mortgage guide
• - Capped rate mortgage guide
• - Cash back mortgage guide
• - Flexible Mortgage guide
• - Offset Mortgage guide

We update all our guides regularly. If you are researching Mortgages and we haven't got an exact guide that helps you, keep coming back as we update daily.

What Are Mortgages Used For?

Most commonly, mortgages will be used to finance the purchase of a property and in the case of first charge mortgages; your place of residence and primary abode. However, they can also be used for purposes which include property renovations, financing a second property’s purchase and even to help unlock money to invest in a business opportunity.

Whether you use a mortgage broker or go direct to the bank or other mortgage lender, there will be certain considerations which you should take into account.

Common uses in the UK for first charge mortgages include:

• Property purchases (including your first home)
• Financing the purchase of a second, buy to let property
• To acquire the money needed to refurbish (and improve the value) of a property
• To pay off consolidated debts in a more structured way
• To unlock some money to invest in a business venture

How Does a Mortgage Work?

Mortgages work by securing a loan, usually of many tens or hundreds of thousands and in some cases millions of pounds, against a property.

The property-owning borrower then repays the loan capital plus interest over an agreed period of time, until such time that the mortgage loan is repaid. Because the loan itself is secured against a property, should the property owner default on or miss payments, they stand to have their property repossessed by the lender.

As with any secured loan, the premise of the loan being secured against a valuable asset and all the commitments and responsibilities that come with it must be taken into account by the borrower before committing to the mortgage itself.

Types of Mortgages in the UK

There are many different types of mortgages in the UK, with regards to how the loan and its repayments work; each with coming with its own set of merits as well as disadvantages. It is important when deciding which type of mortgage to select, that you understand the benefits as well as the potential pitfalls of each type. 

Taking out the best mortgage for your circumstances can allow you to live in relative financial comfort whereas acquiring the wrong type of mortgage can lead to a plethora of issues for you, your finances and your chances of securing future credit.

Typical first charge mortgages in the UK will tend to be one of the following:

• Tracker Mortgages
• Fixed-Rate Mortgages
• Interest Only Mortgages

Tracker Mortgages

As their name suggests, tracker mortgages track the interest rate of (usually) the Bank of England, then adding an additional percentage to give the final percentage amount. These mortgages will move up and down as the Bank of England’s interest base rate does so. Thus, borrowers should be aware that if there is a possibility of the Bank of England’s interest rate rising, their mortgage repayments on a monthly and annual basis may well increase too. 

However, should interest rate cuts be on the cards for the UK economy, mortgage holders stand to have their repayment amounts cut accordingly, according to the Bank of England’s changes to the interest rate.

Important to remember though is that most lenders will have an interest rate cap which will dictate that the rate for the mortgage provided cannot fall below a certain percentage with regards to the interest. Hence, even if the Bank of England’s rate falls below that, the mortgage will not.

Fixed-Rate Mortgages

These mortgages fix the mortgage’s interest percentage over a predetermined period of time. This will mean that no matter what happens to interest rates in the UK or otherwise, your mortgage’s interest rate will remain fixed for the term of the fixed mortgage agreement.

One of the key benefits of these types of mortgages is that being fixed in the way they are, they provide borrowers with peace of mind that their mortgage repayments and associated costs will remain the same over a known period of time.

One of the key drawbacks to these mortgages though is that should the Bank of England cut interest rates, those on fixed-rate mortgages will not see the cuts reflected in their mortgage repayments. Furthermore, should the borrower of a fixed-rate mortgage wish to pay off their mortgage or remortgage, there will more than likely be early repayment charges incurred which can prove very costly.

Interest Only Mortgages

Interest-only mortgages sometimes referred to as ‘repayment mortgages’ see borrowers predominantly pay off the interest on the mortgage loan (plus a small amount of the capital) each month. At the end of the mortgage term, they must then repay the outstanding amount in full. These mortgages, although often cheaper with regards to the monthly repayments, require a big commitment to clearing a large amount [the loan’s capital] by the end of the mortgage term in a way other mortgages do not require.

These mortgages are often used by those awaiting the sale and disposal of another large asset, for example in the case of inheritance and probate, which will then pay off the capital of the loan at the end of the term.

How to Qualify for a UK Mortgage

There is no specific method to qualifying for a UK mortgage. However, there are some practices with regards to credit behaviour and how you manage your finances which will give you a much better chance of being accepted for a mortgage in the UK:

-      Be on the Voter’s Register – By being on the voter’s register, you will have a UK address and be a confirmed legal resident of the UK which is one of the pre-requisites to get nay mortgage

-      Have a Positive Credit Rating – If your credit history is poor, for example, if you have defaulted on other loans and credit arrangements, you will likely find it hard to obtain any mortgage, as you will be deemed a high risk to lend to, based on your past behaviour and practices. However, if you have a history of positive credit behaviour, you will be a much better prospect of lower risk for lenders

-      Mortgage Deposit Amount – Lenders will ask for a deposit amount, which will be based on the mortgage amount to be borrowed as well as the property value, you are looking at obtaining. Whilst lenders will likely ask for somewhere between 5-20% as a deposit, generally, the more you have saved up as a deposit, the better your mortgage will be for you.

How Can Money Savings Advice Help You With A Mortgage?

Here at Money Savings Advice, we have partnered with some of the UK’s leading mortgage brokers. They have already helped thousands of people get the best mortgage deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a mortgage unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.