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A Guide to Residential Mortgages

What is a residential mortgage

 

A residential mortgage is a loan of finance that enables someone to acquire a house to live in. The mortgage will usually be provided by a bank or building society, with a term agreed over which to pay back the loan. The amount that can be borrowed will generally depend on the applicant(s’) income and outgoings, with a deposit required i.e. a lump sum to pay off a percentage of the value of the property.

 

Explanation of deposits and ltv ratios

 

In the most basic form of explanation, the higher the amount of deposit you can pay, the better the mortgage deal you can get. To put this into context, if a house is worth £100,000 and you have a deposit of £10,000 you have what would be described as 90% LTV (Loan to Value). In other words, you are borrowing 90% of the loan and putting down 10% of the value.

 

If you were able to pay a deposit of £20,000 against the £100,000 property value, then you would have a LTV ratio of 80%. Most lenders will offer better deals for mortgages where the applicant has a lower LTV rate, offering lower levels of interest rates because the lender has less risk in this scenario.

 

Different types of residential mortgages

 

When it comes to repayment of residential mortgages, there are two main types available – Repayment and Interest Only. With Repayment mortgages, you are paying off a percentage of the capital as well as the interest to the lender. With Interest Only, you are only paying off the interest on the loan each month.

     

    Types of interest rates

     

    When you are applying for a residential mortgage, you will also have the choice of applying for different types of interest rates:

     

    Fixed – Where the interest rate is fixed for an agreed amount of time e.g. fixed at 3% for the first three years of the mortgage.

     

    Tracker – With a tracker mortgage, the interest rate changes if the Bank of England standard rates changes, i.e. it tracks the Base Rate. For example, your rate could be agreed at the Base Rate plus 2%. If the Base Rate goes up by 0.25% then so would your mortgage.

     

    Variable – This type of mortgage is one that can fluctuate throughout the loan term, either based on the index or Base Rate.

     

     

    Who applies for a residential mortgage

     

    A residential mortgage is not just for when you are buying your first house, you would also apply for one if you were moving home or remortgaging. First-time buyers are obviously at the beginning of the homeownership journey and they may be entitled to government schemes like Help to Buy, depending on their circumstances and area of the UK.

     

    When someone is selling one home and buying another one to move into, they would also need to apply for another mortgage at that point. If you are moving mortgage from one lender to another then your new lender would pay off the previous loan and set up a new payment agreement on a new mortgage deal.

     

    People can remortgage for a number of different reasons, most commonly to get a better deal for example, if a fixed rate term comes to an end. Sometimes people remortgage their property to consolidate debts or to release money that can be used for home improvements.

     

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    Reasons a residential mortgage application could be rejected

     

    There are a number of reasons that a residential mortgage application might get rejected, including:

     

    • Poor credit history
    • Affordability (after calculating income and outgoings)
    • A high risk/unusual property
    • Income is difficult to prove (e.g. self-employed without proof of income over a long enough period)

     

    If you have been rejected for an application, or you are worried that you may do then it is a good idea to speak to a residential mortgage broker who will discuss your circumstances. They will then be able to provide advice on the types of mortgage deals that are most suitable and find the best deals for you in the market.

     

    Saving up for a deposit can be really hard. If you managed it, what tips would you share with other first-time buyers to help them to reach their target?

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