What is a mortgage?

Key points

What is a mortgage

A mortgage is a financial tool that combines with a deposit to fund the purchase of a home. It's a long-term loan secured against a property that is repaid in monthly instalments over an agreed period, usually 25-30 years, typically resulting in full ownership once paid off.

Steps to getting a mortgage

The process involves several key steps usually starting with a consultation with a Mortgage Advisor to assess your financial situation and determine your borrowing capacity. After completing a detailed questionnaire covering income, expenses, debt, and lifestyle to help identify suitable mortgage options, you can move on to gaining an Agreement in Principle (AIP). This is a preliminary approval from a lender, based on your financial profile, which provides a borrowing estimate and reassures sellers that you’re a serious buyer. Once you’ve had an offer accepted on a property, the mortgage advisor submits a formal application with supporting documentation, such as proof of income, identity, and savings. This application is reviewed by the lender’s underwriters.

Importance of an Agreement in Principle (AIP)

An AIP is a critical early step in the home-buying journey, as it confirms your eligibility and borrowing capacity, helping you focus on homes within your budget. As well as showing that you are a serious buyer, solicitors often request it before proceeding with offers or legal work. Buyers without an AIP risk delays or complications if issues arise during their financial assessment after making an offer.

Choosing a mortgage term

The length of your mortgage term significantly impacts your monthly payments and overall interest costs. For most first-time buyers in their 20s and 30s, a 25- or 30-year term balances affordability with a reasonable repayment timeline. Older buyers or those with specific goals (e.g., retiring debt-free by a certain age) may need shorter terms. Monthly repayments must align with your income, expenses, and lifestyle. A longer term reduces monthly payments but increases total interest paid.

Fixed rate vs. tracker mortgages

Fixed Rate Mortgages offer predictable monthly payments over a set period (e.g., 2, 3, 5, or 10 years), regardless of fluctuations in the Bank of England base rate. This provides stability and peace of mind for budgeting, particularly in volatile interest rate environments. Tracker Mortgages are linked to the Bank of England base rate, meaning payments increase or decrease as rates fluctuate. This option suits buyers who anticipate falling interest rates and are comfortable with the risk of rising payments.

Overpayment options

Making overpayments on your mortgage can significantly reduce the term and overall cost. Most lenders allow up to 10% of the loan balance to be overpaid annually without penalties. Extra payments go directly toward reducing the principal, lowering interest costs and shortening the loan term. For example, paying an extra £10,000 on a £100,000 mortgage could reduce the term by a year or more.

Dealing with high interest rates

Buyers locked into fixed-rate mortgages at higher interest rates can explore switching to lower rates if interest rates drop. However, early repayment charges (ERCs) often apply, which are typically a percentage of the loan amount. For example, on a £100,000 mortgage with a 2% ERC, the penalty would be £2,000. The decision to refinance must weigh the savings from a lower rate against the cost of the ERC.

Seeking advice from mortgage advisors

A professional mortgage advisor is a valuable resource for first-time buyers. They consider your income, expenses, deposit size, and other factors to tailor mortgage solutions to your situation. Even a simple chat with an advisor can provide clarity on what you can borrow, likely monthly payments, and the types of properties you can afford. Why not have a chat with ESPC Mortgages today and start your property purchasing journey today.