Residential Mortgages

Lenders price by loan to value, the size of the loan measured against the value of the property. A 25,000 deposit on a 250,000 house gives a 90% loan to value. Rates step down as that figure falls, with the steps at 95%, 90%, 85%, 80%, 75% and 60%, so savings that sit just above a threshold are worth topping up.

Buying your first home

First time buyer products are not cheaper than the rest of the market. They are usually a little more expensive, because most first purchases are made with a small deposit, and it is the loan to value that sets the rate rather than your status as a buyer. What it gives you is access: lenders willing to go to 95%, lenders that accept a gifted deposit, and schemes where family support the purchase through a linked savings account.

Affordability comes from your income and your committed outgoings, not a flat multiple of salary. Most lenders start around four to four and a half times income and move from there.

What counts as income

Overtime, bonus and commission are treated inconsistently, with some lenders counting all of it and some none. If you are self employed, expect to be assessed on two years of accounts or tax calculations, usually the lower of the two. A company director is normally assessed on salary plus dividends, though a few use salary plus retained profit, which can produce a larger loan on the same business.

The affordability assessment and stress testing

Lenders also have to check you could still pay if rates rose. That is the stress test, applied at a rate above the one you will pay, usually the product rate plus 1% or a fixed floor. Five year fixes are stress tested more gently, which is why a longer fix can stretch the borrowing further. A car on finance at 300 a month can take roughly 15,000 off the maximum loan.

A fixed rate holds your payment for a set period, most often two, three or five years, and a rise in rates does not touch you until the deal ends. The trade off is the early repayment charge, a percentage of the balance payable if you repay or move the loan early.

A tracker follows the Bank of England base rate at a set margin above it, so your payment moves when base rate moves. Some carry no early repayment charge, which helps if you expect to sell or repay early, while others have penalties as strict as any fix. If a rise of one or two points would cause real difficulty, a fix is the sensible starting point whatever the market predicts.

The headline rate is only part of the picture. Many of the lowest rates carry a product fee of 999 or 1,499, and adding it to the loan means paying interest on it for the term. On a smaller loan a fee free product at a slightly higher rate often works out cheaper, while on a large loan the fee is usually worth paying. Cashback of 250 to 1,000 rarely makes a poor rate worth taking. We compare total cost over the deal period, not just the rate.

When your deal ends you drop onto the lender’s standard variable rate, which is almost always higher. There are two ways out of it.

A product transfer is a new deal with your existing lender. In most cases there is no new affordability assessment, no valuation and no legal work, and it takes days. It suits anyone whose circumstances have worsened, whose property has fallen in value, or who has left it late.

A remortgage moves the loan to a different lender. It means a full application, credit search, valuation and legal work, but the whole market is open and you can change the loan amount or term at the same time. It is the only route if you want to raise money against the property. We start looking about six months before your deal ends.

A mortgage offer usually takes two to four weeks from full application. A purchase completes eight to twelve weeks after your offer is accepted, driven by the conveyancing chain rather than the lender. A remortgage runs to four to six weeks, and a product transfer takes days. Have this ready before you apply:

• Photo identification and proof of your current address
• Three months of payslips and your P60, or two years of tax calculations if you are self employed
• Three to six months of bank statements
• Evidence of your deposit and where it came from, including a signed letter if any of it is a gift

Avoid new credit or a job change between application and completion, because lenders re-check credit files before releasing funds.