How big a mortgage can I get – and what types are available to me?

Drama in the mortgage markets has dominated the financial headlines over the past 18 months as rising interest rates and constant changes to home loans by major lenders have left borrowers adrift.

Interest rates on mortgages are the highest they have been in 15 years, putting pressure on how much existing homeowners and prospective buyers can afford to spend, while house prices remain well above pre-pandemic levels.

For first-time buyers it may mean a compromise on location or property size in order to meet the additional mortgage costs. A record number are already leaving London in order to get on to the property ladder, data from Hamptons estate agents shows.

Meanwhile, homeowners who are remortgaging now and over the next year and beyond will face a shock when they sign on to a new loan at today’s rates. Many will see their mortgage costs double as they come off rates below 2pc.

In this higher interest rate environment, working out how much you can afford to borrow, the best type of mortgage for you and how you manage your payments are all critical decisions.

While home loans are considered “good” debt and a worthwhile investment, overreaching risks getting you into financial difficulty.

Whether you’re applying for your first mortgage or coming to the end of your current loan and don’t know where to start, this article will look at:

• How big a mortgage can I have?
• How does my credit score affect my mortgage?
• How to stay on top of mortgage repayments
• The different types of mortgages
• What to look for in a mortgage broker
• How remortgaging works

How big a mortgage can I have?

The first thing you need to consider is what size mortgage you can afford.

For first-time buyers the type, size and location of the property you can buy will likely be determined by how much you have put aside for your deposit, and what you can afford to borrow.

If you are coming to the end of your existing mortgage, how much equity you have in the property may mean you can reduce your borrowing when you take out a new loan.

However, because rises have been so steep it is likely your monthly costs will still increase. Or if you are looking to move, you will need to calculate how much money you have made on your existing home and how much you are prepared to borrow if you want to upsize.

Use our calculator to work out how much you can afford to borrow and whether recent shocks to the mortgage market will impact your monthly payments.

How does my credit score affect my mortgage?

Credit scores are used by lenders to work out how much of a risk you are as a borrower.

If you have a poor score you may miss out on the deal you were hoping for or you may need to turn to a specialist lender.

This applies to all types of borrowing, including mortgages, so familiarising yourself with your score is an important early step in preparing to buy a home as most major lenders require a high credit score for mortgage applicants.

The good news is that a credit rating is not a fixed number – it is a constantly changing report on how you use credit – and so before applying for a loan there are steps you can take to boost your score.

Telegraph Money explains how to improve your score and avoid a bad rating.

How to stay on top of mortgage repayments

Budgeting for your mortgage payments may look increasingly difficult in today’s economic climate. Despite falling from its peak last October, price inflation is still well above the Bank of England’s target of 2pc.

While “stress testing” rules means your lenders will have made sure you can afford your mortgage if rates rise as high as 7pc, the system does not factor in the impact inflation has on household budgets.

This means borrowers could run into difficulty as rising prices continue to reduce spending power. In March 2023 the Government announced a package of measures to support struggling mortgage borrowers.

The mortgage charter – agreed in conjunction with major lenders – includes options such as switching to an interest-only loan for up to six months or increasing the term of your mortgage.

However, there are other ways to help manage costs. If you’re concerned about keeping up with your mortgage repayments, these are the options in front of you.

The different types of mortgages

Choosing the right type of mortgage for you will depend on multiple factors, including the purpose of the property, your risk appetite and whether you intend to pay down your loan throughout the mortgage term.

These are the main types of mortgage and which kind of borrower they may be best for.

1. Capital repayment mortgage

Borrowers with a capital repayment mortgage pay off the principal amount as well as the interest on the loan throughout the lifetime of the deal. Most outstanding mortgages in Britain are on these terms.

At the end of their loan term they will have paid down the debt – and have a greater equity holding in the property as a result. It may mean they can reduce their loan size when going to remortgage.

Typically repayment mortgages are designed to be paid off over 25 years but in recent years lenders have been giving loans on 30-year terms, or more. This will lower monthly repayments but runs the risk of still paying off mortgages in retirement, and means the total cost of buying a property is far higher.

2. Interest-only mortgage

Popular before the 2008 financial crisis and among buy-to-let investors, interest-only mortgages are loans where the borrower has chosen to just make the interest payments rather than reducing the principal amount at the same time.

This is a cheaper option than capital repayment as you are not making monthly payments against the loan amount itself. One way borrowers who are struggling with rising mortgage costs can relieve some of the pressure is by switching to an interest-only-mortgage.

However, the downside is that unless you have another way of paying down the debt, you might find yourself retiring with a large loan.

3. Fixed-rate mortgage

The most popular type of mortgage in Britain, fixed-rate mortgages are loans where the interest rate you pay stays the same for the term.

It can be a good option for those looking for certainty with their payments and the ability to budget longer term. Fixed loans also protect you if rates rise.

However, fixing runs the risk of leaving you trapped paying more if rates fall before the end of your loan term and most fixed mortgages have exit penalties if you pay off the loan early.

Since rates started rising many borrowers have taken out “tracker” mortgages (see below for more) while they wait for more attractive fixes to be launched.

Find out if a fixed rate mortgage is the best option for you.

4. Standard variable rate (SVR) mortgage

The “standard variable rate”, or SVR, is a lender’s default rate and is used when a fixed or tracker loan ends. For example, if you come to the end of your fixed rate mortgage and haven’t secured another deal you will automatically fall on to your lender’s SVR.

On an SVR your mortgage payments can change month-to-month as the rate – which often tracks the Bank of England’s official interest rate – fluctuates. A lender may offer its SVR at Bank Rate plus 3 percentage points, for instance.

It is rarely recommended for a borrower to be on their lender’s SVR as they are usually priced above comparable fixed or tracker rates in the market.

If the Bank Rate is at 5.25pc, a borrower on the SVR could be paying 8.25pc in mortgage interest, significantly higher than the current market average.

So-called “mortgage prisoners” are trapped on their lender’s SVR because they cannot meet the criteria for new loans. This can create the bizarre scenario where homeowners are deemed unable to meet mortgage payments that are far lower than those they are already paying.

5. Adjustable-rate mortgage

An adjustable rate mortgage is one that tracks a lender’s SVR, but at a discount for a certain period of time, before falling back on to the SVR.

For example, a rate may be a 2 percentage point discount on the SVR for two years, after which it reverts back to the SVR.

However, it means that the amount you pay may change as the SVR fluctuates and it is important to keep track of when the discount is switched off as you will likely end up on a much higher rate.

6. Tracker mortgages

Tracker mortgages are pegged to the Bank Rate, meaning your monthly payments can change frequently.

Over the past decade, when interest rates were at historic lows, tracker rates were a more expensive option than fixed loans. 

However, in recent months this has not been the case. Average tracker rates have been cheaper than the average fix as markets price in more bad news on the inflation over the next couple of years.

As they come without early repayment charges, allowing borrowers to jump off at any time without penalty, the popularity of trackers has increased over the past six months as homeowners bet on rates falling from the recent highs.

7. Buy-to-let mortgage

Buy-to-let mortgages are used by landlords who are purchasing or financing a property in order to rent it out, rather than live in it.

The regulation and rules around these types of mortgages differ from residential home loans and there may be additional requirements for applicants.

For example, buyers are likely to need at least a 20pc deposit to secure a buy-to-let mortgage as the market has a more limited range of loan-to-value products than for residential loans.

These types of mortgages are often interest-only as the monthly cost is lower, increasing cash flow for landlords from their rental income. The principal loan is then repaid at the end of the term.

The interest rates on these loans are also typically higher than those for residential mortgages.

8. 95pc mortgages

Saving for the down payment remains one of the biggest hurdles for those hoping to get on the property ladder.

A 95pc mortgage enables first-time buyers to purchase a home more easily by reducing the deposit they need to save for.

Owning 5pc of the equity in your home gives you some protection if house prices fall, but does leave you at risk in a sharper downturn if you have not increased your equity.

9. 100pc mortgages

Early in 2023 major lenders including Skipton Building Society launched “deposit-free” mortgages, giving first-time buyers an opportunity to purchase a home without having to save first.

First-time buyers were already struggling with high house prices but are increasingly shut out of the market by rising mortgage rates, and the withdrawal of the Government’s Help to Buy scheme. Renters are also contending with increased housing costs impacting their ability to save.

However, without any initial ownership in the property 100pc mortgage holders are at risk of falling into negative equity, where the value of the loan is larger that of the property, if house prices drop.

Telegraph Money explains how 100pc mortgages work and whether they are a good way to buy your first home. Use our calculator to find out how much you could borrow.

What to look for in a mortgage broker

As the mortgage market continues to be volatile, borrowers coming to the end of their loan or those hoping to get on the property ladder face a myriad of decisions. Many may not feel equipped to make these unaided.

A mortgage broker has an overview of the market and can work to find the right option for your circumstances. The vast majority of mortgages are arranged through brokers, whereas in the past banks often sold directly to their customers without an intermediary.

Among brokers there is a wide range of expertise, experience and business models. Finding the right one for your needs can be an important decision in itself.

Telegraph Money takes you through the steps to choosing a mortgage broker, looking at whether a “no fee” broker is better than those who charge, and what to do if you think you’ve been given bad advice.

How remortgaging works

Around 2.5 million homeowners are due to reach the end of fixed-rate mortgage deals throughout 2023 and 2024, and face a significant increase in their mortgage costs.

Rising interest rates have sent mortgage prices soaring since September 2022 leaving borrowers struggling to keep up with a fast moving market.

The average two-year fixed rate is now 6.84pc according to Moneyfacts, the analyst. Some lenders are beginning to reduce their rates as falling inflation increases the likelihood that the Bank of England will slow the pace of its rate increases.

However, working out the best course of action if you are coming up to the end of your fixed rate deal is still a challenge in the current environment, so here’s a breakdown of what you need to know about remortgaging this year: