Getting a mortgage can feel like an impossible task. But like it or loathe it, getting onto the property ladder is still seen as a key milestone in adult life, despite the huge boom in house prices and opaque mortgage system.
We're still in the midst of a cost of living crisis, which hardly feels like the right time to purchase property. But there have been some encouraging signs. As inflation (the rate at which prices rise) appears to have slowed down, some banks – including Barclays, Nottingham Building Society and Yorkshire Building Society – have reduced their interest rates on fixed mortgage deals, which could ease the pressure on first-time buyers.
However, the latest wage growth figures (which show regular pay rose by 7.8% between April and June compared to the same period last year) put pressure on lenders to increase interest rates, meaning some mortgage rates could shoot back up.
If you're feeling confused, you're not alone. While the pandemic encouraged many young women to face their finances head-on for the first time, we've all heard the whispers about how difficult it can be to get on the property ladder or to get approved for a mortgage.
With that in mind, GLAMOUR has created a no-jargon, no judgement guide to mortgages, with expert advice from our financial columnist, Clare Seal.
What is a mortgage?
A mortgage is a type of loan used to purchase property. For example, if you want to buy a house that costs £250,000 but you don't have that kind of cash lying around, you can ask the bank or lender to loan you some money, which you then repay (with interest) over time. If you fail to keep up with repayments, the bank can repossess your home to recover the loan.
Sounds simple enough? Let's break it down one step further. Banks need evidence that you can repay the loan. This includes a substantial deposit (a lump sum of cash that you can pay upfront), a good credit score to see if you've successfully repaid loans in the past, and information about your income and expenditure to see how much you spend compared to how much you earn.
The larger your deposit, the more likely it is that banks will lend to you. You will need a minimum deposit of 5% of the purchase price. So if your dream house is £250,000, you'll need a deposit of £12,500 – at least. Click here to learn more about deposit-free mortgages.
If your mortgage application is approved, you and the bank will then agree on the mortgage terms, including how much you will borrow, the interest rate on your loan, and how long you will take to pay it back. The average mortgage lasts for 25 years, but some borrowers choose longer plans (up to 40 years) to lower their monthly costs.
Touted as the ideal solution for renters who struggle to save.
What are mortgage rates?
Mortgage interest rates are what the bank/lender charges you for borrowing money. You pay a percentage of the amount you borrowed.
When you pay back your mortgage, your pay back the capital (the agreed amount you borrowed) and the interest (the charge made by the lender on the amount you owe).
The Bank of England sets a Bank Rate – often known as the base rate – to help keep inflation under control. This is the interest rate at which the Bank of England lends money to domestic banks, which influences the UK's economy: high-interest rates are set to curb inflation, while low-interest rates encourage economic growth by lowering costs for borrowers, including people seeking mortgages.
For more info about inflation, check out our explainer.
What are the most common mortgage rates?
Mortgages are available at three main rates: fixed, variable, and tracker. Are you still with us? Feel free to get a cup of tea and join us back here in five.
Here are the main mortgage rates:
A fixed-rate mortgage means your mortgage repayments will stay the same across an agreed number of years – even if the Bank of England's base rate changes. While this generally allows you to budget more effectively, you could miss out on saving money if interest rates drop.
A variable mortgage means your mortgage repayments may fluctuate based on the base rate it's tracking. If interest rates increase, so will your monthly repayments, and vice-versa.
A tracker mortgage means your mortgage repayments can go up or down over time – much like a variable mortgage. However, unlike a variable mortgage, the interest rate on a tracker mortgage is set at a fixed amount above or below another rate, which it tracks – usually the Bank of England base rate.
Let's talk about money.
GLAMOUR's financial columnist, Clare Seal, provides her top tips for securing a mortgage:
Save your deposit in the smartest way possible
For most people, the five-figure deposit is the first and largest hurdle on the way to home ownership. If you’re saving for your deposit yourself, you’ll probably be channelling a fair bit of your income into savings, but it’s worth checking to make sure that you’re maximising your money.
For starters, you could save the first £4,000 of your annual savings deposits into a Lifetime ISA, and you’ll be given an extra £1,000 by the government for free towards your deposit. Then, for the next £10,000, your best instant-access saver is Chip+1, a referral-only account with a 1.25% return on your savings. Use both of these tools to their maximum capacity, and that’s an extra £1,125 towards your house savings without you having to do anything – and you can multiply that by two if you’re saving with a partner or friend.
Use innovative solutions to help you get organised
There are a few great tools on the market that roll in budgeting, saving and lifestyle design to help you to organise your finances in a more mortgage-friendly way. New apps Nude and Claro each allow you to set goals, with Nude catering specifically to those saving for a home. Lifetise is a similar platform, which also has a handy Homefinder tool and creates a custom saving plan for you; plus, it links up to online mortgage broker Trussle when you’re ready to start the mortgage process. Use all of the tools available to work out what you can afford to aim for and to whip your saving habits into shape.
Look after your credit score
Taking care of your credit score is a good habit to get into for your financial confidence in general, but it’s really important in the lead-up to applying for a mortgage. It’s not the actual number that banks will look at, but the report of your financial behaviour that informs the score. This means it might be best to avoid things like taking out new debt and using buy now, pay later services for at least six months before you apply, and always make sure you’re paying bills and utilities on time.
If you currently rent, you can use a tool like Credtiladder to add your rent payments to your credit report, which should be reassuring for banks that you’re hoping to borrow from, as it shows that you can and will pay consistently and on time.
Know when to use a mortgage advisor
In lots of cases, it’s fine to shop around and apply direct to your chosen lender for your mortgage, but if there’s anything ‘unusual’ about your finances or working arrangements – i.e. if you’re self-employed or have some history of debt – you might want to consider speaking to a mortgage broker or advisor (they’re the same thing). These specialists can help you to find the best deal for your circumstances, and they’ll also help you to make sure your paperwork is correct and give you some reassurance and support throughout the process.
Don’t forget about extra costs
The deposit isn’t the only cost involved when buying a house; there are also solicitor’s fees, stamp duty, and searches to be paid for. These will vary depending on the size and price of your property, so it’s a really good idea to research them and make sure you account for them in your deposit savings. If you’ll also need new furniture, or if the house will need decorating or renovating, you’ll also need to consider those costs.
Keep up the good work after you land your mortgage
Getting a mortgage and clutching the keys to your first property is a huge cause for celebration, but remember that owning a property is a big financial responsibility, as well as a huge privilege. Keep up with the budgeting and organisation that enabled you to save your deposit and land your mortgage, and make sure you have an emergency fund to cover your mortgage repayments if you lose your job or fall ill. You may well also have new things that you’d like to save for, now that you’ve unlocked this big life goal — like a holiday!
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