Our Guide to How Mortgages Work

The Mortgage Bank guide to mortgages and how they work
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What Is a Mortgage?

A mortgage is a secured loan which is used to top up borrower’s deposit towards a property. Most mortgages last for 25 years, and at the end of the loan, the buyer will have paid back the loan in full and own their home outright.

There are many different kinds of mortgage, each designed for different budget, needs and preferences, but all of them follow this basic premise.

How Does It Work?

When you want to borrow the money, you’ll need to work out how much you can afford to pay back each month and how much you need to top up your deposit for a home. The lender will carry out their affordability assessments to decide how much you can afford to borrow. Once you’ve come to an agreement, you both sign a contract you are paid a lump sum.

You then start to make monthly payments on your mortgage. Depending on your mortgage contract, your payment may be fixed (a fixed-rate mortgage) or change slightly from time to time depending on the interest rate (a variable rate mortgage).

If you fall behind on your mortgage payments, your home could be at risk. A mortgage is a secured loan, which means the lender can repossess your property and sell it f they think there is a chance they won’t be able to get their money back.

How Much Can You Borrow?

The total you can borrow depends mostly on your income and outgoings, and every lender will have their own slightly different way of working out how much you can borrow. This is based on an ‘affordability assessment’, which is designed to prevent people from borrowing mortgages they can’t afford to repay.

In general, it is possible to borrow 3-4.5 times your annual salary, although the exact amount will depend on your circumstances. If you have a lot of fixed expenses (such as childcare), an unpredictable income or a bad credit history, you might not be able to borrow as much as three times your salary.

On the other hand, if you have a very high paying job, few outgoings and an excellent credit rating, you may be able to borrow up to six times your salary.

How Are Mortgages, Repaid?

The vast majority of mortgages in the UK are repayment mortgages. In this kind of mortgage, you make a monthly repayment which partly goes towards paying off the capital you borrowed and partly towards paying off the interest on that capital.

In rare cases, it is possible to get an ‘interest-only’ mortgage, where you only pay off the interest on your loan but not the capital. In this kind of mortgage, your monthly payments are incredibly low, but you’ll still owe all your capital at the end of the loan and need to find another way to pay it back.

You won’t be able to get this kind of mortgage without presenting your lender with evidence of your strategy for raising enough money to pay off the mortgage.  

How Much Are Mortgage Repayments?

The size of your monthly repayments depends on how much you have borrowed, the interest rate of your loan and the length of your loan.

The more you borrow and the higher the interest rate, the higher your repayments are. The longer your mortgage, the lower your repayments are because they are spread over a longer period of time. However, borrowing over a longer-term will cause you to pay more overall because the interest on you will have longer to mount up.

When you are working out how much you can afford to repay, bear the 28/36 rule in mind (though it’s a guideline rather than a rule). It suggests that you aim to keep your monthly mortgage repayments at less than 28% of your pre-tax income and your overall debt spending (inclusive of the mortgage) at less than 36% of your pre-tax monthly income.

How Long Does It Last?

Most mortgages last for 25 years although it is possible to get a mortgage for just ten years or up 30 years long.

It can be difficult to extend a mortgage without creating a new contract, which can include fees and other expenses.

However, most mortgages allow you to pay them off early, for a fee, if you have a windfall or earn more than you were expecting when you took it out.

How Is Interest Calculated?

The interest rate you are offered on your mortgage is dependent on a variety of factors, including;

  • Your credit rating
  • The size of your deposit
  • Your income
  • The wider economy

The interest rate advertised by lenders in their literature may not be the one you are offered. Instead, the lender will decide how much of a risk you are to lend to by looking at your credit rating, how much you earn and how much you have managed to save for a deposit. Having a deposit of 25% or more can help to unlock the best rates.

Even though the lender will tailor the terms of the mortgage to your ‘risk level’, you can choose how your interest is worked out. There are many different ways that interest can be calculated on a mortgage. All of them can be split into two categories: fixed-rate and variable-rate interest.

A fixed-rate mortgage has a set interest rate which does not change, meaning your monthly payments will always stay the same, whereas on a variable-rate mortgage, 

the interest rate- and your payments- can go up and down depending on the economy or the lender.

There are many types of variable-rate mortgages.

Some of the most common are:

Can You Leave a Mortgage?

When you leave one mortgage contract for another, it is known as ‘remortgaging’. Whether or not you are allowed to do this and how much it would cost you depends on your contract.

Most mortgages allow you to leave the contract after any introductory offers have finished, which tend last for the first 2-5 years of the mortgage.

When you leave a mortgage, you may have to pay exit fees or ‘early repayment fees’ to close your current contract, as well as arrangement fees with your new provider to set up a new agreement.  

All lenders have a basic mortgage known as their ‘standard variable rate’. This tends to be free to leave or has low exit fees.

What Happens if You Don’t Pay Your Mortgage?

Not keeping up with mortgage repayments could land you in serious financial trouble. A mortgage is a secured debt, which means that if you don’t pay it, your lender has the right to sell your home to recover their money.

It is imperative to consider all the costs of your mortgage before taking it out, to ensure you can afford to pay it back.

How Can The Mortgage Bank Help?

Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.

They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme 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.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting The Mortgage Bank.
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