Property > Mortgages
What Is a Mortgage?
Put simply, a mortgage is a type of loan used to buy a property.
Properties are expensive, and therefore the majority of people can’t afford to buy them outright with cash. For this reason, you can borrow money from a bank or building society to cover the majority of the purchase price – the money you borrow is known as a mortgage.
Typically, borrowers will pay back the amount borrowed, known as the ‘capital’, as well as some interest, in monthly instalments over 25 years. The length of the mortgage agreement is known as the ‘term’.
In This Article
Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio is a percentage given to outline the size of your loan in relation to the value of the property.
LTV can be calculated using the equation below:
(Amount Owed ÷ Value of Property) x 100 = LTV
For example, if you’re buying a house for £100,000, with a deposit of £20,000 and a loan of £80,000. The LTV ratio at the time of purchase is 80%.
(£80,000 / £100,000) x 100 = 80% LTV
Mortgage lenders use LTV as an indication of the level of risk. A high LTV ratio is seen as a higher risk – you are borrowing a larger percentage of the property value; therefore, the lender’s potential loss is greater if repayments can’t be made.
After the purchase has been made, your LTV will vary over time due to changes in the property value and size of your mortgage. This is particularly important to understand if you’re looking to remortgage.
What Is a Deposit?
The deposit is the money you need to pay upfront when purchasing a property. Unfortunately, your mortgage doesn’t cover this payment, and therefore, it’s likely you’ll need to save up some cash or utilise a government aid, such as a Lifetime ISA.
The deposit size will vary depending on your finances, the interest rate you’re looking to achieve on your mortgage and the value of the property. Having said this, the deposit usually sits somewhere between 5-25% of the property price.
How Does My Deposit Size Affect My Mortgage?
Generally speaking, a larger deposit will give you access to more competitive mortgage deals with lower interest rates and more affordable monthly repayments. By paying more upfront, you are required to borrow less in relation to the value of the property (lowering your LTV ratio), and therefore you are less of a risk to lenders.
Types of Mortgage
There isn’t one best mortgage type; it can depend on a range of factors such as your personal circumstances and market conditions. Below is a quick introduction to the different mortgage types.
- Fixed-Rate Mortgage
Your interest rate will stay at an agreed rate for a set period of time (usually 2-5 years). Due to your rate being fixed, you benefit from a stable monthly repayment, which won’t be influenced by changes in the market.
- Tracker Mortgage
Your interest rate will mirror another base rate, usually the Bank of England base rate, plus an agreed margin for the lender. So if the base rate rises, your interest rate will increase by the same amount, and the reverse is also true.
What is the base rate?
This is the rate the Bank of England lends out money to banks or financial institutions.
- Standard Variable Rates (SVR)
The SVR is a rate defined by the lender, and although several factors may influence changes to the rate, it is ultimately up to the lender to decide the rate. Due to the rate being variable, your monthly repayments will change in line with fluctuations to the SVR.
The SVR is the rate you are put on when your existing deal ends and is usually slightly higher than most mortgage deals. For this reason, you may choose to remortgage onto a new deal when your previous agreement ends.
- Discount Mortgage
A discount mortgage is where the lender offers you a discount on its standard variable rate for an agreed time period. For example, if the SVR was 3.5% and you received a 1% discount, you would pay 2.5%. If the SVR increased by 1%, so would your discounted rate. At the end of the discounted period, you would be moved onto the SVR.
Mortgage Payment Options
There are two main payment options to be aware of: repayment mortgages and interest-only mortgages.
- Repayment Mortgage
A repayment mortgage means that you will pay off the interest and a bit of your mortgage capital each month. You are reducing your debt until your mortgage term has ended and you are debt-free. This is the most popular form of mortgage repayment.
- Interest-Only Mortgage
With an interest-only mortgage, you only pay off the interest, none of your mortgage debt. Although this is cheaper on a monthly basis, it doesn’t contribute towards paying off any actual debt and therefore, you will be required to pay back the full amount at the end of the mortgage term. It is worth noting that this type of mortgage is currently very rare.
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What Is Loan-to-Value Ratio?
The Loan-to-Value (LTV) ratio is a percentage given to outline the size of your loan in relation to the value of the asset, e.g. a property or car.
How Does My Deposit Size Affect My Mortgage?
The article explores the impact of the deposit size on a mortgage, showcasing how higher deposits tend to attract more competitive rates.
Types of Mortgage
There isn’t one best mortgage type; it can depend on a range of factors such as your personal circumstances and market conditions. This article is a quick introduction to the different mortgage types.