Residential Mortgages
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If you’re looking to buy a home, chances are you’ll need a residential mortgage. This type of loan is designed specifically for people who want to live in the property they’re buying, whether you’re a first-time buyer or moving to your next home. Let’s break down what you need to know about getting the right mortgage for your situation.
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Written by:
Alison Gibson
Ascot Mortgage Expert
Last Updated:
24.09.2024
Written by:
Alison Gibson
Ascot Mortgage Expert
Last Updated:
24.09.2024
What is a Residential Mortgage?
A residential mortgage is essentially a loan taken out to buy a home where you plan to live. It’s one of the most common ways people in the UK finance their property purchases. The mortgage is secured against your property, meaning if you can’t keep up with your payments, the lender has the right to take possession of your home.
This type of mortgage is for people who want to buy a house to live in, rather than to rent out or sell for profit. The amount you can borrow depends on several factors, including your income, the size of your deposit, and the value of the property.
Residential Mortgage Rates
Residential mortgage rates are crucial because they determine how much you’ll pay in interest over the life of your loan. Rates can vary depending on the lender, the type of mortgage, and your financial situation. You can check real-time mortgage rates here. Here’s what you should consider:
- Fixed rates: These lock in your interest rate for a set period, usually 2, 5, or 10 years. They offer stability, which is great if you want to know exactly what your payments will be each month.
- Variable rates: These can change over time, often in line with the Bank of England’s base rate. While they can be lower than fixed rates initially, they might go up, making your monthly payments unpredictable.
How a Residential Mortgage Works
When you take out a residential mortgage, you’re borrowing money to buy a home, and you’ll repay this loan in monthly instalments over a set term, typically 20-25 years. Here’s what you need to consider:
- Deposit: You’ll need a deposit, which is a percentage of the property’s value. The more you can put down, the better the mortgage deal you’ll likely get. Most lenders look for at least 5% to 20%.
- Loan to Value (LTV): This is the size of your mortgage compared to the value of the property. If you’re buying a £200,000 home with a £150,000 mortgage, your LTV is 75%. A lower LTV generally means lower interest rates.
- Repayment: You can choose between a repayment mortgage, where you pay off both the capital and interest, and an interest-only mortgage, where you only pay the interest. The latter results in lower monthly payments but requires a plan to repay the capital at the end of the term.
How Much Deposit Do I Need for a Residential Mortgage?
The deposit is a key part of securing a residential mortgage. Typically, you’ll need at least 5% to 20% of the property’s value. For example, if you’re buying a home worth £300,000, you’ll need a deposit of £15,000 to £60,000. The more you can save for a deposit, the more mortgage options will be available to you, often at better rates.
What is Loan to Value (LTV) for Residential Mortgages?
Loan to Value (LTV) is an important concept to understand. It’s the ratio of the loan amount to the property’s value. If you have a high LTV, say 90%, you’re borrowing 90% of the property’s value, which is riskier for the lender. That risk is often reflected in a higher interest rate. On the flip side, a lower LTV (e.g., 60%) might get you a much better rate because you’re borrowing less relative to the value of the home.
Based on a mortgage of £300,000 at 75% LTV and 25 years Today’s best buy mortgages
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3.92% Fixed £1,182 £1,099 75% 3.92% Fixed £1,185 £1,516 75% 3.93% Fixed £1,185 £1,025 75% 3.94% Fixed £1,186 £1,295 75%
How Does Interest on a Residential Mortgage Work?
Interest is what you pay the lender for borrowing the money to buy your home. The amount you pay in interest depends on your residential mortgage rates. Here are the main types:
- Fixed Interest Rates: These remain the same for a set period, giving you peace of mind that your payments won’t change. Once the fixed term ends, you’ll usually be moved to the lender’s standard variable rate unless you remortgage.
- Variable Interest Rates: These can go up or down, depending on the lender’s decision or movements in the Bank of England’s base rate. It can be more of a gamble but could save you money if rates fall.
What are the Different Types of Interest Rate?
Interest rates can be categorised mainly into:
- Fixed-Rate Mortgages: These provide consistency in payments, ideal if you want to avoid fluctuations.
- Tracker Mortgages: These follow the Bank of England’s base rate, meaning your payments could go up or down.
- Discounted Variable Rate Mortgages: These offer a discount on the lender’s SVR, but the rate can change.
Residential Mortgage Calculators
Using a residential mortgage calculator can help you estimate your monthly repayments based on the mortgage amount, interest rate, and term. This tool is invaluable for understanding what you can afford and how different interest rates will affect your monthly budget.
Mortgage Repayment Calculator
Monthly Repayments Explained
Your monthly repayments are determined by the type of mortgage you choose and the interest rate. Let’s break it down:
How Are My Payments Calculated?
Your payments are calculated based on the mortgage amount, interest rate, and term length. The higher the loan amount or interest rate, or the shorter the term, the more you’ll pay each month.
Capital and Interest Repayments
Most people opt for a capital and interest repayment mortgage, where each month you pay back part of the loan (the capital) and some interest. Over time, you’ll see more of your payment going towards the capital, meaning you’re gradually reducing the amount you owe.
Interest-Only Repayments
With an interest-only mortgage, your monthly payments only cover the interest, not the capital. This means lower payments each month, but at the end of the term, you’ll still owe the original loan amount. It’s essential to have a plan in place for repaying that capital, whether it’s through savings, investments, or selling the property.
How Can You Find the Best Residential Mortgage?
Finding the best residential mortgage isn’t just about the lowest interest rate. You need to consider the fees, the flexibility of the mortgage, and your long-term plans. This is where a mortgage broker can be helpful. We can help you navigate the many options out there, find deals you might not see on your own, and guide you through the application process.
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FAQ
The amount you can borrow for a residential mortgage depends on several factors, primarily your income, outgoings, and credit history. Lenders typically calculate the maximum mortgage you can afford by using a multiple of your annual income. For instance, if your annual salary is £50,000, a lender might offer a mortgage up to four or five times your income, resulting in a potential loan amount of £200,000 to £250,000.
However, lenders also take into account your regular outgoings, such as debts, household bills, and lifestyle costs. They’ll perform a stress test to ensure you can afford the repayments even if interest rates rise. It’s wise to speak to a residential mortgage broker who can assess your situation and give you a clearer idea of how much you could borrow.
When applying for a residential mortgage, you’ll need to provide several documents to prove your identity, income, and financial stability. Here’s a checklist of the typical documents required:
- Proof of Identity: Passport or driving licence.
- Proof of Address: Utility bills, council tax statement, or bank statements, usually dated within the last three months.
- Proof of Income: Payslips (usually the last three months) if you’re employed, or tax returns and accounts if you’re self-employed.
- Bank Statements: Typically the last three to six months, showing your income and outgoings.
- Proof of Deposit: Evidence of where your deposit is coming from, such as savings account statements or a gifted deposit letter if it’s from a family member.
Lenders might ask for additional documents depending on your circumstances, such as proof of bonus income or details of any outstanding loans.
Yes, it is possible to switch from a buy-to-let mortgage to a residential mortgage, but the process requires careful consideration and lender approval. This change typically happens when you decide to move into a property you originally bought as an investment.
To make this switch, you’ll need to inform your lender and apply for a residential mortgage product. The lender will reassess your financial situation, including your income and credit history, to ensure you meet the criteria for a residential mortgage. Keep in mind that the rates and terms of a residential mortgage can be different from those of a buy-to-let mortgage, so it’s essential to weigh up the costs involved.
Yes, you can have two residential mortgages, but it’s not as straightforward as it may seem. The most common scenarios where this occurs include buying a new home before selling your current one or purchasing a second property for a family member to live in.
However, having two residential mortgages can be tricky because lenders need to be confident that you can afford the repayments on both properties. They will scrutinise your income and outgoings even more closely than for a single mortgage. In some cases, lenders may require you to justify why you need a second residential mortgage rather than a buy-to-let mortgage.
If you want to rent out a property that you originally bought with a residential mortgage, you’ll need to get consent to let from your lender. This is essentially permission to let out your home while keeping your current mortgage in place.
The process for getting consent to let involves contacting your lender and explaining your situation. The lender will assess whether your mortgage terms allow for letting and may adjust your mortgage rate to reflect the increased risk of renting out the property.
Keep in mind that some lenders may charge a fee or increase your interest rate as a condition of granting consent to let. Additionally, if you plan to let the property long-term, the lender may require you to switch to a buy-to-let mortgage instead.
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Ascot Mortgages authorised and regulated by the Financial Conduct Authority and can be found on the FCA register (www.fca.org.uk) under reference 776062. The FCA do not regulate some forms of mortgages. The guidance and advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK. There may be a fee for mortgage advice. The precise amount will depend upon your circumstances but we estimate it will be £599 per mortgage account. Ascot Mortgages Ltd give you the option to pay a non-refundable fee of £1299 payable with the application. If this option is taken, Ascot Mortgages Ltd will refund any procuration fee received by the lender.
Ascot Mortgages Limited is registered in England and Wales and have their registered office at 8 Webster Court, Westbrook, Warrington, WA5 8WD. The company’s registration number is 06764971.
We are a credit broker, not a lender. We work with the whole of the lending market. We may receive commissions that will vary depending on the lender, product, or other permissible factors. The nature any commissions model will be confirmed to you before you proceed.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY DEBT SECURED ON IT
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