How does a residential mortgage work?
Securing a residential mortgage typically requires the borrower to provide a deposit which is typically 10% of the value of the property which the borrower plans to secure the mortgage on.
The money will usually be used to purchase or refinance against the security of the property and the terms of the repayment will be agreed upon between the borrower and lender.
Residential mortgages can sometimes be referred to as ‘First Charge Mortgages’ as the lender is taking the first legal charge against the property. This is why if a borrower, if under any circumstance fails to make repayments to the lender, the lender is well within legal rights to take possession of the property as security of repayment.
Some other fine details revolving around mortgage loans include:
- A typical mortgage loan term can last for up to 25 years, however there can be shorter-term loans secured, as well as loans up to 40 years.
- Shorter repayment periods will result into higher monthly payments if the loan is on a capital repayment basis; which is detailed under the different types of mortgage products in this document
- Interest rates can vary between 1% and 9% this year and is dependent on the product. The latest Statista insights concluding 2022 show the average interest rates for a 2-year fixed rate mortgage was 17% and 5-year fixed rate mortgage was 4.68%.
- Larger deposits lead to better lending rates as the borrower will be seen as less of a risk. The bigger the deposit is, the smaller the proportion of the value of the loan which the lender is providing.
- This is referred to as Loan to Value (LTV) and usually the maximum LTV is between 90-95% of the value of the property.
- Early Repayment Charges (ERCs) are a fee charged by lenders when a borrower tries to repay a mortgage off earlier than the end of the term. The amount of the ERC imposed by lenders is dependent on the total borrowed amount and the remaining length of the mortgage term, or term of the product rate they have applied for. This will be agreed when finalising the terms and conditions of any loan agreement.