Mortgages, Explained

How lenders decide what you can borrow

Lenders look at two things: whether the loan is affordable for you, and whether the property is adequate security for it. Affordability is assessed from your income, your regular outgoings and existing credit commitments, then stress-tested against higher interest rates.

Your deposit matters as much as your income. The larger it is relative to the price, the lower your loan-to-value, and lower loan-to-value bands generally attract better rates.

The main types of mortgage

With a repayment mortgage each monthly payment covers interest and a slice of the loan, so the balance reaches zero at the end of the term. With an interest-only mortgage you pay only the interest and must repay the full loan at the end, so lenders want to see a credible plan for doing that.

Rates are either fixed for a set period, which gives certainty over your payments, or variable, such as a tracker that follows the Bank of England base rate. When a deal ends you normally move to the lender’s standard variable rate unless you switch.

• Fixed rate: the same payment for the length of the deal
• Tracker: follows the base rate up and down
• Discount: a set reduction on the lender’s variable rate
• Offset: your savings reduce the balance interest is charged on

Costs beyond the monthly payment

Compare the total cost of a deal rather than the headline rate. Arrangement fees, valuation fees and early repayment charges can outweigh a slightly lower rate, particularly on smaller loans.

When to use a broker

A broker can search across many lenders, including some that do not deal with the public directly, and knows which are likely to accept your circumstances. That is especially useful if you are self-employed, have a small deposit or an unusual property.

Ask how the broker is paid, whether they cover the whole market, and check that they are authorised on the Financial Conduct Authority register.