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Residential Mortgages

Buying a home can be a complex process. Our expert residential mortgage brokers and advisers can help guide you through financing your property, ensuring that you get the best rates and deals according to your specific needs.

Residential Mortgages

Each year, residential mortgages help millions of people buy their first and second homes around the UK. Find out how this popular credit financing product works and get expert insights into the residential mortgage process.

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What is a residential mortgage?

This is the most common form of long-term credit in the UK. Unless you have considerable savings and assets, buying a home is no easy task – which is why residential mortgages are so popular. They are usually large loans taken over a period of 25 years or more, and they can be taken out by first-time buyers, people who are relocating, and homeowners seeking to remortgage their current properties. 

Because the loan amount is so large, it is secured against the home you are buying, so any defaults on repayments can result in the property being legally seized by the lender and sold to recoup their investment. The value of the property, along with your own eligibility, will determine how much you can borrow and other terms of the financing.

The terms and eligibility requirements for this type of financing differ from provider to provider, but the one common requirement is that the property must be used as your residence – so you cannot let it out to tenants.

How does a residential mortgage work?

Getting a residential mortgage can be seem daunting and complex as eligibility criteria will vary from lender to lender. Here are four of the main elements to consider when looking to purchase an affordable new home.

 

How much deposit will I need for a residential mortgage?

It is very rare to get a residential mortgage that covers the entire value of the property. Usually, the lender will require a deposit of 10-30% of the home’s value. Some exceptions can be made for first-time buyers, and the government’s Help to Buy scheme can help qualified buyers to pay as little as 5% of the home’s value as a deposit.

Typically, a £250,000 home can incur a deposit of £25,000-75,000, so it’s essential that this is calculated into your buying process.

 

Interest on a residential mortgage

Lenders make money by adding interest to your residential mortgage, and how much they earn as their fee is determined by the interest amount, how much you borrow, and the term of the loan. Essentially, your monthly payments include a repayment of the capital as well as an annual percentage rate against the value of your debt. The longer the term of your loan, the more interest you will pay but the lower your monthly payments will be. 

When considering a mortgage, it’s important to calculate the interest amount you will have to pay back in addition to the capital repayment.

Residential mortgage interest rates can be applied to your loan in three different ways, each with its pros and cons.

  • Fixed-rate – This means that your interest rate will stay unchanged through the initial fixed term part of your residential mortgage, so if it’s set at 5%, that’s what you’ll pay each month until the end of the fixed term period. This can be beneficial if interest rates rise because your mortgage repayments will stay the same, but it does mean that your payments won’t go down if the interest rate drops.  At the end of the fixed term the payment will then change, typically to the standard variable rate.

 

  • Variable-rate – These interest rates will be set by the lender, usually using the lender’s standard variable rate (SVR) or a discount on the variable rate for a set period of years within your mortgage term. While the discounted rates are usually quite good, there is the risk of paying higher interest at a later point in the term, so it’s worth considering remortgaging once this discount runs out.

 

  • Tracker rate – This is a variable rate of interest that tracks against the Bank of England base rate – for example, 2% above the base rate. As a result, it will rise and fall with the changes in the base rate, so your payments tend to change over the term. This means you’ll pay less when interest rates are low, and more when they are high.

 

The loan to value ratio (LTV)

The LTV is how much you will be able to borrow against the value of the property you are purchasing. The lower the LTV, the lower the risk of the loan and the more likely it will be granted with favourable terms, while it can be more of a challenge to find high LTV loans. A low LTV is considered to be lower than 80% and a high LTV is around 85-90%.

For example, buying a £200,000 home with a £50,000 (40%) deposit and a £150,000 residential mortgage will give you a low LTV of 75%. Lenders will find this favourable because the high deposit value compared to the home’s value means their investment is lower in risk. After all, you have already put in a fair amount of capital. 

However, if you buy the same house with a £20,000 (10%) deposit and a £190,000 loan, you’ll have a high LTV of 90%. This will cause lenders to look for more security for their investment, either by denying the loan or charging higher interest rates to help regain their investment.

If you have a high LTV, you can help increase your chances of a favourable residential mortgage by increasing your deposit, having a financially secure partner co-sign the mortgage agreement, and working with a mortgage broker who can find the most competitive and affordable mortgage deals.

 

The type of residential mortgage

Broadly speaking, there are two main types of residential mortgage.

1. Capital and interest repayment mortgage

In this type of mortgage, you pay a portion of the capital along with the interest applied to the loan each month. By the end of the term, you will have paid off the home in full. This is the most common type of residential mortgage.

 

2. Interest-only residential mortgage

 Here, you only pay the interest on the loan each month, not the capital. The capital amount will be due in full at the end of the mortgage term. While this is a popular type of mortgage for property investors, it is less common with residential buyers because of the risks, as you will have to make sure you can pay the capital amount in one large lump sum. If it cannot be repaid, the home can be seized by the lender, foreclosed on, and sold to recoup the sum.

 

Remortgaging your home

Remortgaging your current residential property can be a useful process if you want to get better terms and rates on your current loan (for example, if you borrowed with a high LTV and are now in a more financially stable position) if you want to consolidate your debts, or move between a fixed rate, variable rate, or tracker rate mortgage.

If you are considering remortgaging, it’s a good idea to speak to a broker, as there will be fees involved when switching to a new mortgage. Your broker can help explain all the relevant fees and negotiate with a new lender to get you a good deal.

 

Can you have two residential mortgages?

Yes – although you can expect most lenders to refuse any more than two residential loans. There are two reasons for this.

Firstly, residential loans are meant to supply a home for you to live in rather than build a property portfolio of buy to let properties. A second residential mortgage is seen as reasonable if you are remortgaging your current home, buying a holiday home, or buying a home for a family member. Secondly, your risk increases with every mortgage you take out because each additional debt creates financial pressure on repayments.

If you are interested in developing a property portfolio and having a home you can let out for rental income, a product called a buy to let mortgage is the best option, as it is tailored to the investment market.

 

Differences between buy to let and residential mortgages 

The key difference is that a residential mortgage is for a primary residence or holiday home, while a buy to let mortgage (BTL mortgage) is designed for people who want to earn rental income from a property by renting it out to tenants.

Typically, BTL mortgages carry slightly different eligibility requirements and higher fees than residential mortgages because they incur a higher risk for lenders. For example, you can expect to be required to pay a deposit of 25-40% of the property’s value and demonstrate the expected rental yield from the property. 

In addition, while these loans can work like a traditional residential mortgage where you pay a portion of the capital and the interest per month, it is a lot easier to get an interest-only BTL mortgage, which also allow you to repay the interest only on the loan, with the capital due at the end of the repayment period.

Speak to a mortgage broker for the best residential mortgage deals

 

Mortgages for Business, we have access to the best and most affordable residential mortgage deals in the UK, and our team is ready to help you buy your first home, remortgage your current property, or secure your new home. Start your new life with our team of experienced, independent brokers. With over 20 years of expertise, we’ll work tirelessly to deliver a mortgage that is affordable, ethical, and competitive.

Residential: News and insight

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    Understanding the role of Credit agencies and how your credit score impacts your mortgage application can be really helpful in securing your property finance. Could improving your credit score increase your likelihood of sourcing a better rate?

  • Most Popular Property Improvements and How to Finance Them

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NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE