What is a residential mortgage?
A residential mortgage is a loan designed to help borrowers purchase a property which they will live in. The property must be used as a residence by those taking out the mortgage, they are not able to rent out these properties to tenants nor use the properties for commercial purposes.
Residential mortgages are available to potential first-time homebuyers or existing homeowners and who are looking to purchase another property or refinance their existing property. Lenders (i.e., bank societies and financial institutions) offer these mortgages in the UK, with specific criteria which must be met by the borrower. These general criteria can include:
- Being a UK resident
- Proof of annual income (typically, many lenders will require borrowers who have income of at least £25k per annum
- Having sufficient savings or equity
- Must be able to demonstrate affordability (to prove that you can make repayments based on your income)
- Relevant legal records and documentation (such as passports, utility bills, bank statements of up to 3 months or more)
These are just some general ones, but they can also differ subjective to the lender.
Here at West One, our residential mortgage products have been designed to cater to borrowers who have a range of different needs. Find out more by clicking below:
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.
What are the different types of mortgage products?
There are a variety of residential mortgage products available which can be suitable for borrowers with different needs. These include:
- Repayment mortgages – A borrower pays the whole mortgage over a set period with monthly payments, including the interest charges added to it.
- Interest-only mortgages – A borrower only pays the interest of the loan, and you pay off the balance at the end of the mortgage term. Usually, this is used when a homeowner plans to sell the property or refinance onto a different financial product, such as a Buy-to-Let mortgage.
- Fixed-rate mortgages – A borrower gets money at a fixed interest rate for a set amount of years (usually 2-year or 5-year fixed). After this fixed period is finished, the rate changes the lender’s standard variable rate (SVR) for the rest of the mortgage term.
- Tracker mortgages – In this type of mortgage, the interest rate changes subject to the interest rates set by the Bank of England.
- Variable rate mortgages – Where the interest rate changes over time. The lender will set a ‘base rate’ and adjust it on an agreed-upon schedule such as monthly or annually.
- Discount rate – A form of variable rate mortgage where the interest rate is set just below a lender’s standard variable rate for a set period of time.
A borrower looking to secure a mortgage should look into each product and discuss with a financial advisor to see which product would be most suitable to their circumstances.
Each mortgage type can pose many advantages and disadvantages depending on the circumstances.