How Mortgages Work: Your Essential Guide To Paying For A Home


The average home in the UK costs £268,000, according to the Office of National Statistics – and that’s almost ten times the average full-time salary of £27,000. Unless you are very wealthy, you are unlikely to be able to buy that home outright. Instead, you can use a mortgage to fund the bulk of the purchase.

Why you need a mortgage

Successfully applying for a mortgage is, for most people, the crucial step towards securing their dream of owning a home. A mortgage is a loan from a bank or building society that you use to purchase a property and then steadily pay back over many years. You agree to pay a proportion of the property’s price, known as your deposit, and the bank agrees to fund the rest over a set period, usually 25 to 30 years, charging you interest for the privilege.

Most mortgages will be lent on a capital repayment basis, where you steadily repay the amount of money you have borrowed plus the interest you owe on it. There are also interest-only mortgages, where you only pay interest – as the name suggests. At the end of the mortgage term, you will not have repaid any of the debt and will need to find the money to return the sum you borrowed to the lender. An interest-only mortgage comes with cheaper monthly payments but without the structure that lets you pay off a mortgage slowly and steadily over time.  Interest-only mortgages were once very popular but have fallen out of favour after financial authorities and banks got worried by the number of people failing to put a saving plan in place to repay them.

Why your deposit matters

Before even thinking about applying for a mortgage you will need an idea of how much you can afford to put down as a deposit, as this will determine the rate you can get and product you go for. For first-time buyers this deposit will be the cash amount they can afford to put down. For home movers it will be the cash they have plus the equity in their existing property. Your equity is the sum left once the mortgage you currently owe is subtracted from your home’s value – essentially, it’s the bit you own. There’s no getting round the fact that saving for a deposit is hard work. The benchmark deposit percentage for competitive mortgage deals is about 25 per cent now, but you can still get a good mortgage with a 10 per cent deposit. Don’t forget, you will need to put aside a large chunk of cash for things like fees and stamp duty. The total can reach thousands of pounds, so will eat into the size of your deposit.

How much can you borrow?

Once you have an idea of how much you can afford you can speak to a bank or building society directly to discuss products or use a mortgage broker who can scour the market for you. Whichever route you choose, the lender will want to know one crucial thing: can you afford to pay this money back? They will assess that by using your earnings and your outgoings to decide what you can afford to borrow. Once upon a time this was calculated as a multiple of your salary, for example four times your earnings.

Now lenders must follow strict rules on affordability, looking at your income and spending and working out what they think you can afford to borrow. You should prepare for a grilling to show how you will afford the mortgage and what your monthly essential spending amounts to. Make sure you have all the documents you need to back up your application, such as payslips, bank statements and bills. Banks and building societies will want to know about things ranging from your utility bills, to nursery fees, mobile phone contracts and how much you spend on leisure. The lender will evaluate the property, your spending and your credit rating and decide if you are a worthy borrower.

Fixed or tracker rate: Different types of mortgage 

The chief difference between the mortgages you can pick from is whether the interest rate is fixed for a set period or can rise or fall. Lenders will offer mortgages either with a fixed rate, a tracker rate that typically follows the Bank of England base rate, or a variable rate that can be changed whenever it wants. These options also tend to come with an initial deal period of a set length. For example, you might fix for five years, after which you move to a default standard variable rate. During that deal period you will usually be locked in by hefty exit fees, known as early repayment charges. Once the deal period is up you can move to a better deal from another lender without having to pay these.

There are a range of factors to consider when deciding on the type of home loan that’s best for you, such as how long you plan to stay in the property, the type of flexibility you want and how much you can afford to repay. The great advantage of a fixed rate is that it gives you set monthly payments over a number of years, thus providing some security. The longer the fix, the higher the rate will typically be, but you are paying for the extra security against rising rates that brings. A tracker rate can change, usually with the Bank of England base rate.  A variable rate will usually be linked to a lender’s own standard variable rate, often at a discount to this. These deals can have the lowest rates around, but your lender could raise its standard variable rate any time it chooses to, independently of whether the Bank of England raises rates.

Mortgage rates and why keeping them low matters

There are two ways to keep your mortgage rate low. Firstly, put down a larger deposit and, secondly, remortgage to the best rate you can when your existing deal runs out. The bigger your deposit, the lower your mortgage rate is likely to be, as the bank will be lending you a smaller amount and putting less of its own money at risk.  The level you borrow at is known as the mortgage’s loan-to-value.

Short-term deals are often cheaper than longer-term ones, for example a two-year fix is cheaper than a five-year fix. But mortgages tend to come with fees for taking them out and regularly chopping and changing every two years could prove more costly – and leave you exposed to interest rates being higher when it comes to the time to move. You also have to look out for the standard variable rate that the mortgage moves to at the end of the deal. This is generally higher than the fixed or tracker rate you were previously on and so will cost you more.

While your application will be worked out on the basis that you are repaying the loan over 25 or 30 years, you are likely to be better off if you remortgage once you come to the end of a deal period. So, it can be better to compare the cost of a mortgage over the deal period, rather than over the full-term. If you are at the end of a mortgage deal it is important to look around the market for what else is on offer, as this should save money on your repayments. You will have been moved onto the standard variable rate, so there are likely to be cheaper deals around that could prove a better option.

Watch out for extra costs

Many lenders will have extra costs in the guise of application, product or processing charges, which could add thousands to your purchase. Rather than just going for the cheapest rate, it is important to weigh up the overall cost of your mortgage by looking at both the rate and any fees, as this will impact how much you pay back over time. A lot of lenders will say their mortgages are portable. This means if you need to move it can come with you. But this will be based on the value of the new property and you are likely to have to go through an application process again.


If you do have any queries or require assistance with mortgages, then please don’t hesitate in contacting us on 01482 638300 where we will be happy to help.


This article was written by Marc Shoffman for ‘This is Money’

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Pension Tips For Married Couples

How To Make Sure You Get What You’re Entitled To – And Make The Most Of Your Retirement Pot

It may not seem like a grand romantic gesture, but making sure your spouse is financially comfortable in retirement, will go a long way towards securing your future happiness together.

The pension pay gap remains significant with 33 per cent of men expected to retire with just the state pension compared to 53 per cent of women, meaning many wives are reliant on their husbands for a financial top up. On average UK men have £73,600 saved in a pension pot and women have just £24,900.

With this in mind, these are our top pension tips for married couples.

Take the time to sit down and talk

Planning for retirement should be a joint process to ensure you make the most of your time together. Start by estimating an annual budget and calculate how much you will need to cover the bills and your ideal amount of disposable income. Remember you will no longer be paying commuting costs or pension contributions and it is likely that your mortgage will be paid off. It is important that you discuss with your spouse when you would like to retire particularly if there is an age gap. Many couples agree to retire at the same time, so they can share the experience and leave no room for resentment.

Make the most of your personal tax allowance

Every adult has a personal allowance, which is the level of income that you can have before paying tax. It is therefore important for both partners to have separate pension income in retirement, so you don’t end up paying more tax. For example, if only one of you has a pension and it is £20,000 a year the income over £11,500 will be taxable. But if you both have an annual pension of £10,000 each, neither of these will be tax deductible.

Benefit from a workplace pension scheme

By April of this year, every employer will have to provide a pension for their eligible employees. Contributions are currently 1 per cent from the employer and 1 per cent for the employee. Michelle Cracknell, chief executive of the Pensions Advisory Service, said it is worth joining the scheme if you are both working and earning over £10,000 per annum. ‘Even if you only intend working for a short time with the employer, you will still benefit from building up a pension pot that you could transfer to a new employer’s pension scheme or take the money out any time after age 55.’

Ensure you have enough national insurance credits

If you reach state pension age on or after 6 April 2016, you cannot increase your state pension through your partner’s national insurance contributions because it is based on your own record. The full state pension is £159.55 per week, but that is only available to individuals who have a complete record of national insurance contributions. In order to get the full basic state pension, you need to have paid or received credits for national insurance for 35 years. If you have had a break in your payments and will not make the 35 years, you can make voluntary contributions. Also, a top tip is to always register for child allowance even if your partner earns over £50,000 per annum and you do not wish to receive the benefit. By registering for the child allowance, you will get national insurance credits that add to your 35-year target.

Provide a pension for your partner

Even if one of you is not working, you can still have a pension that the earning spouse pays into. Andy McCombe, financial adviser at Go IFA, explained: ‘You can pay up to £3,600 per annum into a spouse’s pension if they are not working but this will only cost you £2,880 as they effectively reclaim the tax for you. ‘And even if a spouse is earning, you can also pay into their pension. For example, if a wife earns £40,000 a year you can pay up to 100 per cent of those earnings so a working husband could pay in £40,000 a year.’ A working wife could do the same.

Keep records up to date

A pension scheme may also provide a pension for a partner and dependants on your death. However, there is usually a requirement to complete paperwork on who you are electing as a partner/dependant. As well as providing a pension, your employer may also pay out a lump sum if you die whilst in employment. This is often called a death-in-service scheme. On your first day, you may have been asked to complete a nomination of wishes form saying to whom you would like the lump sum to be paid in the event of your death. The trustees of the scheme decide to whom the benefit should be paid.

What to do if you are not married

It is important to check the rules for each of your pension schemes if you are not married.  Some will consider civil partnerships, and some will pay out to a partner but only if you can demonstrate financial dependency


If you have any questions or queries about how this may affect you, contact ICF Financial Services on 01482 638300 and we will be happy to help.


This article was written by Lily Canter from ‘This is Money’.

Borrowers in Denial Over Interest-Only Mortgages Must Act Now

Homeowners with an interest-only mortgage and no way to repay it when their term ends have been told stop burying their heads in the sand and face up to reality. A stern warning from the UK financial services watchdog says there are 1.67 million people in Britain with either a part or full interest-only mortgage – equivalent to 17.6 per cent of mortgaged homeowners in the UK. Many of these borrowers are coming up to the end of their 25-year terms and have no idea how they’ll repay their mortgage.

Shifting to a repayment mortgage is an almost impossible task for those with little time left to run. A borrower with five years left and an £80,000 debt on a 4.5 per cent standard variable rate could see monthly payments rocket from £300 to £1,520. But instead of contacting their lender to see what their options are, the Financial Conduct Authority (FCA) has discovered that many of these borrowers are simply ignoring the problem. The FCA warned that this could realistically lead to large numbers of them ultimately losing their homes as lenders are forced to take possession of properties to settle the debt.

Jonathan Davidson, of the FCA, said: ‘Since 2013 good progress has been made in reducing the number of people with interest-only mortgages. However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.’

How big is the interest-only mortgage problem?

There are currently 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK. They represent 17.6 per cent of all outstanding mortgage accounts and over the next few years increasing numbers will require repayment.

In 2013 the FCA identified three residential interest-only mortgage maturity peaks. The first peak is happening now and it’s likely these borrowers have lower mortgage debt, higher incomes and are approaching retirement, according to the FCA.  They’re hoping this means the first round of interest-only borrowers will be able to manage the problem relatively easily.

However, the next two peaks in 2027/2028 and 2032 include less affluent individuals. They borrowed on much higher income multiples at the point of application, show greater rates of mortgages converted from repayment to interest-only and are likely to have built up far less equity in their homes.  The concern is that these are the homeowners who are more at risk of shortfalls. The FCA found that most lenders have written to interest-only customers asking them to get in touch, but too many borrowers aren’t engaging.

If you have an interest-only mortgage

The FCA is forcing lenders to be reasonable and aid you as much as they possibly can. First, get in touch with your existing mortgage lender to find out how big the problem is. It may be that you have savings or a pension pot you could reasonably use to repay the loan, in which case there’s little to worry about. If you don’t have any savings, it may be possible to sell your home and downsize without needing a new mortgage, allowing you to settle the debt this way.

If this isn’t an option either, then there is a range of other options available. Your lender will look at what you can afford to pay on the mortgage each month and transfer you onto a mortgage that means you’re paying off some of the loan as well as the interest each month. This will start to bring your debt down over time, and as it goes down, you can switch to paying more and more of the loan off as the interest gets less.  This might prove trickier for those with a bigger outstanding balance. If you have five years left on your term, switching this to a full capital repayment loan would see monthly payments shoot up by £1,218 to £1,518 a month. Therefore, most lenders will move you to part and part, so the payment shock isn’t so acute.

If you’re very close to the end of your 25-year term, your lender might also look at extending this term to help you keep the cost of your monthly payments down. Most lenders will approve a mortgage term up until the age of 70 with many accepting borrowers much older than this providing they can demonstrate how they plan to pay the mortgage each month. The longer the term, the lower the monthly repayments. However, you’ll take longer to repay the mortgage overall, so you’ll pay more interest. It’s therefore generally a good idea to keep the term as short as you can manage.


Depending on your circumstances, you might find you can remortgage your loan to another lender. Mortgage rates are very low at the moment, so if you’re paying your existing lender’s standard variable rate then it’s likely remortgaging will save you money every month. This could be hundreds of pounds depending on the size of your mortgage. With this option, it’s likely you’ll have to switch to a repayment mortgage and you’ll need to be able to demonstrate your income and monthly expenditure still means you can afford to make the mortgage payments.

Remortgaging with your existing lender is likely to be easier as the FCA has rules – known as ‘transitional rules’ – that allow them to be a bit more lenient. This means that if you are already at the limit of what you can afford to repay each month, your lender can take this into account when trying to help you find a solution. It may be that this route could bring down your interest rate, giving you some room to start paying back some of the loan too. New lenders must adhere to stricter rules that mean you must be able to prove you can afford the new loan.

Are you over 55? 

The FCA’s recent Financial Lives 2017 research identified that 70 per cent of all interest-only and part capital repayment mortgages are held by customers aged over 45. This means their ability to remortgage their debt onto a new term is more limited and could prove prohibitively expensive.   If you’re older and are set to retire soon, you may find it a bit trickier to extend your mortgage term or remortgage.  This is because most lenders have an upper age limit on mortgage lending. You also need to be able to say how you plan to meet monthly mortgage payments after you retire.  If you know you aren’t going to be able to afford this, then you could either choose to downsize or look at equity release.

In the past year or so, equity release options have become a lot more flexible and affordable. It’s now possible to remortgage your interest-only loan to a retirement lender, keeping it as an interest-only loan and continuing to pay the interest monthly. When you retire and don’t want to pay the monthly interest anymore, you can switch the loan to a lifetime mortgage. This allows you to roll up the interest monthly into the loan. The debt is then repayable when you or your beneficiaries sell the property. This can be expensive as you pay interest on the interest over time, but rates have come right down over the past few years and it’s now possible to get a rate as low 4 per cent. To qualify for equity release, you need to be over the age of 55.

If you have any questions or queries about how this may affect you, contact ICF Financial Services by phone on 01482 638300 and we’ll be happy to help you.


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What do you Really Need to Save for Retirement?


It’s the million-pound question: how much is enough when it comes to saving for retirement? According to official figures, four in ten of us are underestimating what we need to set aside. Half of the 12 million workers ‘under-saving’ earn at least £34,500 a year, according to a Government study of its flagship workplace pension scheme.  That means 6 million middle-class workers face a drop in their standard of living when they retire, unless they act now. Most people save into ‘defined contribution’ plans that are linked to the stock market. With these deals, working out just how much you need to set aside to ensure a comfortable retirement is tricky. So how much do you need in old age? And how can you make sure you’re saving enough?

Calculators at the ready

Your first task is to work out what income you’ll need when you stop work. Some experts say you should aim for two-thirds of your final salary. For someone on the average UK wage of £27,000, that would mean an annual income of £18,000 in retirement.  The Department for Work and Pensions analysis says someone on £13,000 or less should aim to have 80 per cent of their salary in old age, or £10,400 a year. For someone on more than £55,000 it recommends 50 per cent, or £27,500 a year. Other experts suggest setting aside a lump sum worth ten times your final salary. Therefore, someone earning £27,000 would need £270,000 to see them through old age.

In truth, everyone is different. To work out the right number for you, sit down with a pen and paper and roughly calculate your likely retirement outgoings. Start with essential spending such as utility bills, running the car, the food shop and repairs.  The Office for National Statistics says the average annual food spend is £2,808 while gas and power bills cost £1,253. Remember, these numbers will rise every year with inflation. Next, consider the costs of the lifestyle you want. Include holidays, meals out and hobbies such as golf or dancing classes. As well as considering practical considerations such as whether your spouse will be relying on your pension, and whether you might downsize your property or move into retirement accommodation which charges fees.

Don’t underestimate how long you will live, or forget the state pension

Don’t underestimate your life expectancy. Many savers only expect their pension pot to need to last them a few years, but a 65-year-old can typically expect to live two more decades. Peter Chadborn, director at advice firm Plan Money, says: ‘We are living longer in retirement and each generation seems to want a better retirement lifestyle than the one before. You may have 40 years of earning to save enough for 25 years of not earning.’ Remember the state pension will lighten your load. The full £159.55 a week flat-rate pay-out works out at £8,296 a year. Therefore, if you’re aiming to have a retirement income of £18,000 a year, you’ll need to fund about £10,000 yourself. You should multiply this amount by 25 years to work out the absolute minimum you’ll need — £250,000 in this case. This figure presumes you’ll run down the pot gradually, so nothing is left. In reality you’re likely to continue to get a return on your savings during retirement if you’ve invested them wisely. You won’t want the pot to run dry in case you live beyond 25 years, or so you can leave something for a spouse, so think of these figures as a starting point.

How to cover the basics

The International Longevity Centre think-tank estimates that workers typically need to save 18 per cent of their salary to obtain these target retirement incomes.  With bills, mortgages and supporting children through university, that’s far too much for most people to give up. One solution is to start saving as early as possible. This gives your money longer to grow — and means it gets an extra boost from compound interest. Experts say it’s a mistake to wait until you don’t have a mortgage and the children have flown the nest. Peter Chadborn says: ‘A little from a young age is a good discipline — waiting until your mortgage-free might mean you can save more but you won’t have as long to do it.’

Under the Government’s flagship retirement scheme introduced in 2012, the vast majority of company staff are now automatically enrolled into pensions by default. But not enough is going into their pots.  The finding that 12 million people are under-saving comes from the DWP’s analysis of its ‘auto-enrolment’ programme. Currently, only a minimum of 2 per cent of your annual salary must go into your pension pot under the DWP’s rules. Half of this must come from your employer (they pay this on top of your normal salary). Basic-rate taxpayers then have a minimum of 0.8 percentage points and higher-rate payers 0.6 percentage points deducted from their salary and put into the pension.  The remaining 0.2 or 0.4 percentage points comes from the Government in the form of tax relief.

Firms are only obliged to ensure 2 per cent of earnings between £5,876 and £45,000 go into your pension. If you saved 2 per cent of the full average £27,000 salary, a total of £45 (including tax relief and your employer’s contribution) goes into the pot each month. At that rate, if you started saving at age 20 you would have just £24,300 by age 65. But the benefits of a workplace pension mean it wouldn’t cost the earth to increase your savings to the magic £82.50-a-month mark. At least £22.50 of this would come from your employer (the 1 per cent payment your boss must make), with the Government providing £12 in tax relief. That leaves you sacrificing £48 a month from your salary.

If you’re starting at age 40 and need to put aside £280 a month, tax relief would provide £51.50 and your employer would pay £22.50.  That leaves you needing to contribute £206 from your salary. The minimum percentage for auto-enrolment savings will rise to a total of 5 per cent in April 2018 and again a year later to 8 per cent. Saving that percentage from the full £27,000 average income would increase your contribution to £180 a month, or £2,160 a year, meaning you’d comfortably meet your target for a £15,000 annual income.

If you have any questions or queries about how this may affect you, contact ICF Financial Services by phone on 01482 638300 and we’ll be happy to help you.


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State Pension Age Rise Brought Forward


Six million men and women will have to wait a year longer than they expected to get their state pension, the government has announced. The rise in the pension age to 68 will now be phased in between 2037 and 2039, rather than from 2044 as was originally proposed. Those affected are currently between the ages of 39 and 47.

The announcement was made in the Commons by the Secretary of State for Work and Pensions, David Gauke. He said the government had decided to accept the recommendations of the Cridland report, which proposed the change.

“As life expectancy continues to rise and the number of people in receipt of state pension increases, we need to ensure that we have a fair and sustainable system that is reflective of modern life and protected for future generations,” he told MPs.

Anyone younger than 39 will have to wait for future announcements to learn what their precise pension age will be.

‘Cocktail of ill health’

The change will affect those born between 6 April 1970 and 5 April 1978. The government said the new rules would save the taxpayer £74bn by 2045/46. While it had been due to spend 6.5% of GDP on the state pension by 2039/40, this change will reduce that figure to 6.1% of GDP.

Labour said the move was “astonishing”, given recent reports suggesting increases in life expectancy were beginning to stall, and long-standing health inequalities between different income groups and regions in retirement. 

Shadow work and pensions secretary Debbie Abrahams told MPs that many men and women were beginning to suffer ill health in the early 60s, well before they were entitled to their state pension.

“Most pensioners will now spend their retirement battling a toxic cocktail of ill-health,” she said. “The government talks about making Britain fairer but their pensions policy, whether it is the injustice that 1950s-born women are facing, or today’s proposals, is anything but fair.”

Age UK was also critical of the change. “In bringing forward a rise in the state pension age by seven years, the government is picking the pockets of everyone in their late forties and younger, despite there being no objective case in Age UK’s view to support it at this point in time,” said Caroline Abrahams, charity director at Age UK. “Indeed, it is astonishing that this is being announced the day after new authoritative research suggested that the long term improvement in life expectancy is stalling.”

Pensions Commission

The government has also committed to regular reviews of the state pension age in the years ahead. That raises the prospect of further rises. Indeed a report by the government’s actuary department in March suggested that workers now under the age of 30 may have to wait until 70 before they qualify for a state pension.

Tom McPhail, head of policy at Hargreaves Lansdown, said the government would need to do more to encourage saving, particularly amongst younger people. “For anyone yet to reach age 47, there is still time to adjust their retirement plans by looking to contribute more,” he said. “We feel it is important the government meets them halfway; we need a national savings strategy to help people save and invest for their future. A good starting point would be for the government to look at a savings commission.”

The SNP said it remained opposed to raising the pension age beyond 66 and reiterated its call for an independent pensions commission to be set up to look at “demographic differences across the UK”.  In response, Mr Gauke said the Scottish government would have the power to provide extra financial help for those approaching retirement if they so chose.

If you wish to discuss how the state pension age increase will affect you, please feel free to get in touch on 01482 638300 and someone will be more than happy to help you.


This article was written by Brian Milligan who is a personal finance reporter for BBC News.