What is a residential mortgage?

A residential mortgage is a large loan designed to help one or more individuals buy a property to live in. The property must be used as a residence by those taking out the mortgage, so you won’t be able to buy the property to rent out to tenants or use it for commercial purposes. The vast majority of us will need to borrow money to buy our first home and the most common way to do this is by getting a residential mortgage.

Residential mortgages can be taken out by first-time buyers, those moving home or those looking to re-mortgage. Your bank or building society will lend you a chunk of money which you will use alongside a cash deposit to help buy your home. You’ll then pay back your mortgage loan in monthly instalments over an agreed term with added interest.

What happens if you do not keep up your monthly instalments?

Residential mortgages are secured against your property which means that if you are consistently unable to keep up with your mortgage repayments, your lender has the legal right to repossess your home. Ultimately, this means you could be forced to sell your home so that the lender can recoup its money, but this is usually a last resort.

How long do residential mortgages last?

The length or ‘term’ of a residential mortgage is typically 25 years, but mortgage terms are gradually getting longer, with more people opting to take out a mortgage over a period of 30 years or more.

Choosing a longer-term mortgage can help to make monthly repayments more affordable, but it also means you will pay more in interest, so the total cost of your mortgage will be higher.

If you are re-mortgaging, it can be tempting to increase the mortgage term again, but if you can afford to keep it shorter, you’ll save money in the long run.

Also, note that many lenders have an upper age limit of 75 at the end of the mortgage agreement. This means that if you’re 60, for example, you would have to agree to repay your mortgage over a 15-year term.

What size deposit do I need for a residential mortgage?

The amount of deposit you need depends on your circumstances and lenders. Some lenders offer residential mortgages if you only have a deposit of 5% to 10% - or £10,000 to £20,000 on a £200,000 property. Some will need a deposit of 30% to 40% of the property’s value. This means on a £200,000 home, you would need a deposit of £60,000 or more to get the best rates.

Lenders offer their best rates to those with larger residential mortgage deposits because they are perceived to be lower risk. This is simply because you will be borrowing less and there will be enough equity in the property to cover the amount you wish to borrow.

What loan to value do I need?

The loan to value (LTV) of a mortgage refers to the size of the mortgage compared with the value of the property.

For example; if you were buying a £200,000 home with a £60,000 (30%) deposit, you’d borrow £140,000, giving you an LTV of 70% (140,000/200,000). Or, if you had a deposit of £20,000 (10%), you’d borrow £180,000, giving you an LTV of 90% (180,000/200,000).

Low LTV ratios are considered to be below 80%, while high LTV ratios are 85% to 90% or more.

What are the different types of residential mortgages?

When choosing a residential mortgage, you’ll need to decide what type of mortgage you want. There are several mortgages on the market. Generally, people choose between the following:

· Fixed-rate mortgage

A fixed-rate mortgage lets you pay a fixed rate of interest for a set time – often this is 2, 3 or 5 years, but some fixed-rate mortgages last as long as 10 years.

The advantage of a fixed-rate mortgage is that your repayments remain the same each month, making it easier to budget, and there’s no need to worry about interest rates rising during the length of the deal.

However, the main drawbacks are that interest rates are not always as competitive and if interest rates drop your repayment will still remain the same. Therefore if you want to get out of your deal early, you may have to pay a hefty early repayment charge.

· Tracker mortgage

A tracker mortgage is a type of variable rate mortgage that tracks the Bank of England base rate. This means that your mortgage interest rate can rise and fall in line with movements in the base rate, and your monthly repayments can therefore fluctuate.

Tracker mortgages are generally cheaper than fixed-rate mortgages – particularly when the base rate is low. However, they are less suitable for those on a tight budget. If you are thinking about applying for a tracker mortgage, it’s important to check whether you could afford your monthly repayments to increase if the base rate went up.

· Variable rate mortgage

Every lender has its own variable rate. Some variable-rate mortgages move up or down at the lender’s discretion. The most common form of this is a lender’s standard variable rate (SVR) which is the rate you will usually be moved on to once your existing mortgage deal has come to an end (say after 2 or 5 years). The SVR is usually more expensive, so it’s better to move off it and re-mortgage as soon as you can.

Another form of a variable rate mortgage is a discount rate mortgage which offers a discount on the SVR for a certain length of time. For example, you might be offered a discount of 2% on the SVR for 2 years.

· Discount rate mortgages

These can be the cheapest mortgages but, as they are linked to the SVR, the rate will change according to the SVR and are only available for a fixed period of time.

· Offset mortgages

Your mortgage account is linked to your savings. You only pay the interest on the difference between your loan and your saving. As you are using your savings to reduce your mortgage interest, you won't earn any interest on them. Therefore you will also not pay tax, helping higher-rate taxpayers.

· Flexible mortgages

Allow you to overpay when you can afford to. Other mortgages give you this option too, but you can also pay less at particular times or miss a few payments altogether if you have chosen to overpay. This does however come at a cost, as the mortgage rate will generally be higher than other mortgage deals.

How do residential mortgage monthly payments work?

With a residential mortgage, you will need to make a payment each month until you have paid off your mortgage in full. There are two payment types that you will come across:

• Repayment mortgage: where your monthly payment includes a portion of the capital (the amount borrowed) and interest. Over time, your mortgage balance will decrease and by the end of the term, you will have paid off your mortgage in full
• Interest only: where your monthly payments only include interest – you don’t pay back any of the capital, so your repayments are lower. At the end of your mortgage term, you will need to repay the whole capital either by selling your home, re-mortgaging or using investments or savings.

How do I get a residential mortgage?

To give yourself the best chance of getting accepted for a residential mortgage, there are several steps you can take before you apply:

• Save up a large deposit: the bigger the deposit, the better your chances of being offered a lower interest rate and the less you will pay each month
• Find out roughly how much you can borrow
• Get your finances in order: mortgage lenders will scrutinise your finances and check your bank statements before deciding whether to lend to you. Make sure you are not spending unnecessarily and make cutbacks where you can
• Check your credit score: you can do this for free with the three main credit reference agencies (Experian, Equifax and TransUnion). The better your credit score, the more likely you are to be accepted for a mortgage
• Take steps to improve your credit score: such as registerin to vote, paying bills on time and correcting any errors on your credit report
• Compare residential mortgages online: shop around using best-buy tables to find the best mortgage rates
• Speak to a mortgage broker: a good mortgage adviser will be able to assess your situation and help you find the right mortgage deal to the costs of a residential mortgage?

When applying for a residential mortgage and buying a home, there will be a range of costs you will have to pay. These include the following:

• Product fees: also known as ‘application fees’, ‘arrangement fees’ or ‘booking fees’. You will need to pay a product fee to the lender to secure a particular mortgage deal. You may be able to add this fee to your mortgage, but this will increase the amount you owe.
• Valuation fees: paid to your lender to carry out a valuation of your property to ensure it is worth the amount you wish to borrow
• Survey fees: you will also need to have a survey carried out to check the general and structural condition of the property. There are generally three different levels to choose from (condition, homebuyer and building).
• Legal fees: paid to a solicitor or conveyancer to carry out the necessary legal work involved in buying a home
• Telegraphic transfer fees: to pay for your lender to transfer the money to your solicitor in the form of a CHAPS payment
• Higher lending charge (HLC): some lenders charge this fee if they consider you a higher risk because you have a small deposit
• Broker fees: if you choose to use a mortgage broker you may have to pay a fee
• Early repayment charge: should you need to get out of your mortgage early, many deals charge early repayment fees
• Exit fees: some lenders charge a fee when you full repay your mortgage, even if you are not paying it off early

When buying a home, you may also need to pay stamp duty. How much you pay will depend on the value of your property and whether you are a first-time buyer.