Mortgages explained

A mortgage is a loan, typically obtained from a bank or building society - although there are also specialist mortgage lenders - which is used to purchase property or land. 

The loan is usually secured against the value of what you buy, so if you fail to keep up with your repayments, the lender can take back whatever you bought.

As an online mortgage broker, Mojo works with over 70 lenders, each with their own distinct lending criteria. We can, therefore, help you find a lender with criteria that best suits your circumstances. As well as minimising your chance of rejection, this also helps us to better cater to customers with more complicated financial histories.

How much can you borrow when you take out a mortgage? 

This will depend on a wide range of factors, but affordability is the main one. Lending is usually based on a multiple of your annual income - this is between 4 to 5 times for most people, depending on the lender and their circumstances. 

Although in certain circumstances it’s possible to borrow more than that - usually if you’re a high net worth individual or in a certain profession.

Aside from the amount of income you have, a lender will consider the following when determining how much they will lend you:

What types of mortgages are there? 

Residential purchase mortgages - usually (but not always) for first-time buyers purchasing their first home

Buy-to-Let mortgage - This is a mortgage used to buy a residential property you intend to rent out for profit, rather than live in. A buy-to-let mortgage almost exclusively used by those intending to be landlords, although some people may become a landlord accidentally or temporarily, depending on their circumstances

Commercial mortgage - This is usually for business use, so can be used to buy commercial property either to rent out, similarly to buy-to-let, or to run a business from, rather than buying commercial property. Some lenders also allow this type of mortgage to be used for large business purchases, such as machinery, or to buy a complete company

Remortgage - A remortgage is mainly used as a money saving technique. It’s where you already have a mortgage, which you switch to another deal and/or lender. This is most commonly to avoid the SVR rate of interest at the end of an initial deal period, but some people also remortgage to move to another property or increase their loan. Remortgages are available on residential, buy-to-let and commercial mortgages

What are mortgage interest rates and how do they differ?

Something that can get lost in translation with mortgages is that interest rates are often mistaken with the mortgage type. In reality, no matter what type of mortgage you take out, there will be a variety of interest rates available. 

So for example, the term ‘5 year fixed-rate mortgage’ could apply to any of the 4 mortgage types referred to in the previous section.

Mortgage interest is what you pay for the privilege of borrowing the money from the lender. Most lenders offer both fixed and variable deal types, each of which are priced differently based on the LTV of your borrowing and wider economic factors.

What is the LTV (loan to value)?

The loan to value of your borrowing is what lenders use to determine which rates you’re entitled to. Typically, the higher your LTV, the higher the rates you’ll have to pay.

You can read a more in depth article about LTV here, but put simply, it’s the difference between the value of your chosen property and how much you’re borrowing. 

So if the property is £200,000 and you’re going to borrow £180,000 of that (because you have a £20,000 deposit) then your LTV is 90% - as you’re borrowing 90% of £200,000.

What types of interest rates are there? 

When you choose a mortgage, there will be a variety of different products available within the mortgage type you need. 

So, for example, if you need a residential mortgage to buy a home, you might want a specialist residential product such as a self-build mortgage, a green mortgage, or even an interest-only mortgage. But you’ll still need to choose the interest-rate type. This could be:

• A fixed-rate mortgage - so the rate you pay won’t change for an agreed period. Fixed rate mortgage deals often last 2-5 years, but can be much longer - even as long as the life of the mortgage in some cases

• A variable-rate mortgage - There are 3 types of variable interest-rate type, SVR (standard variable rate), discount rate and tracker rate. You can find out more about each of these individual variable rate mortgage types by clicking on them, but essentially any variable rate can change within the deal period

How do I choose the right mortgage for me?

Choosing the right mortgage is an important decision as you’ll likely be paying it off for a very long time. The average length of a mortgage in the UK is now 25-30 years. Take time to look at every element of the mortgage and how suitable it is to your needs and goals. 

Of course, you’ll also need to meet the criteria, which means that there may be some degree of compromise needed. You won’t necessarily qualify for the size of loan or interest rate you want immediately, so be ready to decide whether not now is the best time for you to get a mortgage.

To make your decision with greater confidence and certainty, it’s a good idea to take mortgage advice from a qualified broker, like ourselves. Mojo offers free guidance where you need it. If anything is unclear, one of our fully qualified and FCA registered mortgage experts will be happy to cut through the jargon for you.