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Published 21 October 2021
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What is a Residential Mortgage?

A residential mortgage is used to purchase a property that you plan to live in. The loan is taken out against the property and can come in various forms, such as fixed or variable rate deals, and repayment or interest-only options. Read on to learn more about how they work.

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Any mortgage taken out against a property in which you plan to live is a residential mortgage.

Like other forms, residential mortgages enable home buyers to purchase a home using a loan provided by a mortgage lender.

Usually, the buyer will need to provide a deposit for the home they are buying with the lender covering the rest of the cost – you will then pay the lender back, with added interest, over a set period of time.

There are various types of residential mortgage available. Find out what options there are and which might be suitable for you.

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What are the types of residential mortgage?

Residential mortgages come in all sorts of forms, depending on how you pay interest on your home loan.

Fixed-rate mortgages charge interest at a consistent rate, which means your monthly repayments will be at the same amount for a set period of time, usually between 2 and 5 years but other terms can be available. That ‘deal’ period will be agreed with your lender when you take out the mortgage.

On the other hand, variable rate mortgages, such as tracker mortgages, charge interest based on the market and the current Bank of England base rate. Variable rate mortgages can be attractive when rates are low, however the rate you are charged can change and as a result, your repayments will change from month to month when this occurs. Rates can go up as well as down.

» MORE: Variable vs fixed rate mortgages

You may also have a choice about how you pay the interest on your mortgage. With a capital repayment mortgage, your monthly repayments cover both the money you’ve borrowed and the interest charged on that sum, meaning that when you reach the end of your mortgage the loan is paid off entirely.

Alternatively, you may prefer an interest-only mortgage, where your monthly repayment only covers the interest charged on the loan. When you reach the end of the mortgage term, you will then have to pay off the sum you originally borrowed. These are, however, now less popular than repayment mortgages and may be harder to qualify for. They are also usually only available for lower amounts against the property value than repayment mortgages.

» MORE: Interest-only vs repayment mortgages

How much can I borrow with a residential mortgage?

Many lenders offer residential mortgages in the UK and they will all have different caps in place, covering the maximum sum they will lend to any borrower.

How much you can borrow will also come down to your own financial circumstances. All lenders will check your payslips and go through your bank statements to get an insight into exactly what you can afford to pay each month, both currently and in the future. Responsible lending criteria tests that you have flexibility in your finances to support a level of increase in your financial commitments.

» MORE: Calculate how much you could borrow

How do I get a residential mortgage?

Mortgage lenders operating in the UK offer their own range of products – their eligibility criteria will determine who they can lend to.

Many lenders will accept applications from borrowers directly, so you can simply go through their range, pick out the mortgage that you believe best meets your needs, and submit an application.

However, it’s worth remembering that some lenders only offer their mortgage products through mortgage advisers. An adviser will go through your circumstances and help you work out which deals are worth considering, while they have access to lenders and products that you can’t apply for directly.

» MORE: Best mortgage lenders

Can I overpay on a residential mortgage?

Overpaying on your mortgage can be a great idea, as it means you can pay off the loan amount early. This not only means you are mortgage-free ahead of schedule, but should also save you money on interest payments.

Many residential mortgages allow you to overpay by up to 10% of the outstanding mortgage balance each year. Make sure you carefully check the terms of your mortgage if you are considering this option.

If you attempt to overpay by more than this – the percentage may vary between lenders – then you will likely be charged an early repayment charge (ERC). This is calculated as a percentage of the sum you still owe on the mortgage and can easily run into the thousands.

» MORE: Tips for paying off your mortgage early

Can you change a residential mortgage to a buy-to-let mortgage?

There may come a time when you no longer wish to live in your property, and instead want to rent it out to tenants. If this happens, you will need to adjust your mortgage.

One option is to ask your lender for consent to let. This is the lender agreeing for you to rent out a property which it has lent against. The lender isn’t required to agree to this and even if it does, it can mean that your interest rate is increased and/or you are charged fees. What is more, consent to let may only last for a year or so, meaning you may need to request it again 12 months down the line.

Alternatively, you may need to remortgage to a dedicated buy-to-let mortgage. This is a longer-term solution, though the mortgage lender will again want to carry out affordability checks to ensure you can afford repayments. As your home is becoming a rental property, the lender will want to check that your expected rental income will be enough to pay off the mortgage.

You cannot let out your property to tenants on a residential mortgage without getting permission from the mortgage lender. Doing so would likely be a breach of a residential mortgage’s terms and conditions, and could result in the lender demanding you immediately pay the entire sum you owe.

» MORE: Buy-to-let mortgages explained

Can you have two residential mortgages?

There are times when you might want to take out a second residential mortgage. It may be that you want to purchase a second home, perhaps as somewhere for your family to stay during the holidays, or perhaps you want to take out a joint mortgage with a loved one to help them purchase their first home.

There are no rules against taking out a second residential mortgage, though the lender will want to go through your finances to ensure you can afford the repayments on both of your outstanding home loans.

It’s also worth remembering that purchases of second and additional homes incur a higher rate of stamp duty land tax.

The pros and cons of a residential mortgage

The cheapest way to buy property is to pay cash and buy it outright. However, the vast majority of us cannot afford to do that, making a residential mortgage a necessity. Without one, most people simply would not be able to purchase a home.

With mortgage terms stretching over decades and interest rates competitive, residential mortgages can make homeownership affordable. However, it is important not to overstretch yourself with too big a mortgage or too pricey a property. If you cannot afford monthly repayments, you could lose your home.

» MORE: See current mortgage rates

Can you take out an Islamic mortgage in the UK? 

There are a number of providers which offer Islamic mortgages in the UK. These plans, which are also sometimes referred to as halal mortgages, provide a way for people to borrow but not pay interest, making them compliant with Sharia law.

Does your property make a difference to the type of residential mortgage you need? 

It can do. If you intend to buy, or already live in, a home that is built differently from the norm – for example, a prefabricated concrete home, steel or timber-framed home, or a listed property –  you may find it difficult to get a standard residential mortgage. Instead, you may need a non-standard construction mortgage.  

And if you intend to build your own home, you’ll probably need to explore self-build mortgages

Image source: Getty Images

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