A beginners guide to mortgages

Young people are increasingly giving up on home ownership, as so-called ‘Generation Rent’ struggle to meet mortgage lenders’ requirements. But, there are ways you can secure your place on the property ladder – and a mortgage deal that works for you.

With the Bank of Mum and Dad taking a downward turn, it can be difficult to know where to begin. Your home is the largest purchase you’re likely to make – so you need to do your research and plan smart.

Learn the basics of mortgages, including the different repayment options and what they really entail:

What is a mortgage?

A mortgage is a large loan taken out to buy property. Mortgages usually run for 25 years, but the term can be longer or shorter.

The loan is secured against the value of your home until it is paid off, meaning the lender will repossess your home if you can’t make repayments.

Interest-only or repayment mortgages?

When planning your first mortgage, the first things to get to grips with are the repayment options on offer.

The two main options are interest-only mortgages and repayment mortgages, which are also known as capital and interest mortgages.

With repayment mortgages, a percentage of your monthly payments go towards the value of the property. This type of mortgage is designed so you will eventually pay the full value of your home – and own your home ‘outright’.

On the other hand, with interest-only mortgages, you only pay off the interest on the loan, meaning, if you only make the set monthly repayments, you will still owe the full value of the home at the end of your mortgage term. With the full loan remaining you may need to find a lump sum – and provide evidence of how you plan to do this.

Interest-only mortgages are standard for buy-to-let mortgages because the property can be sold to repay the loan.

To explore a range of mortgage options, visit Know Your Money, where you can compare without submitting any data.

Loan to value and your deposit

Saving for a deposit can be a major source of confusion for first time buyers. Though it’s tempting to buy as soon as you can secure a mortgage, it may be worth saving for longer. When it comes to deposits, size matters.

The bigger your deposit, the lower your interest rate could be. Your Loan to Value (LTV) is the difference between the total value of your home and the amount you own outright. The more you own, the less you pay.

Getting mortgage advice

When buying a property, it is a good idea to seek the support of a mortgage adviser. You may source your independent mortgage advice, or use the service recommended by your estate agent.

You need to be clear on the information you need when speaking to a mortgage advisor. The more detailed mortgage advice process will involve thoroughly crafting the best mortgage based on the information you provide.

Before this, compare mortgages online to browse the best deals for your situation, or speak to a mortgage broker. The traditional methods are also still popular, so paying a visit to your local high street bank should not be ruled out.

You should be aware that not all mortgage advisors will have access to every offer on the market, so it is important to choose your mortgage broker wisely if you choose to take this path.

Mortgage rates

The ideal mortgage rate will depend on your situation. There are many options available, and it’s worth considering each.

Standard variable rate mortgages can fluctuate under the lender’s variable rate, which can change at any time. With fixed interest rate mortgages, interest rates won’t vary, offering more stability and therefore, security.

It is important to remember, though, that this option means you won’t benefit if interest rates fall so that you might pay more.

There are other types available – including tracker rates, which usually move in line with the Bank of England’s base interest rates. Choosing the right type of mortgage rate depends on many factors – like the current interest rate. But, since mortgages are a long-term decision, you should also think ahead, and consider any early repayment fees that may be due, should you wish to swap.