Home Housing Buying A guide to mortgages in the UK
Last update on July 04, 2019

If you’re considering buying a home in the UK, find out about mortgages in the UK and what you’ll need to get one.

There are no restrictions on foreigners getting mortgages in the UK to buy a property, but the system of applying for and being granted a home loan can be complicated. In this guide, we explain how the UK mortgage system works, including affordability considerations, rates and taxes. This guide from HSBC, one of the UK’s biggest banks and mortgage providers, includes sections on:

HSBC

HSBC is one of the largest lenders in the UK, providing a range of award-winning, great value mortgages for people looking for a home or a buy to let property.


Mortgages in the UK

The UK has one of the biggest mortgage markets in the UK, with 11.1 million mortgages worth around £1.3 trillion. Home-ownership is more popular in the UK than in many countries across Europe. Although it has declined among younger age groups in recent years, buying a home and getting a mortgage remains something that many young families plan for. There are different types of mortgages in the UK available through banks and building societies. Most run for around 25 years, although they can be longer or shorter.

Should you buy property in the UK?

There has been uncertainty regarding the UK housing market since the European Union referendum in 2016. Brexit undoubtedly has implications for the UK housing market; it’s difficult to say anything with much certainty at this early stage. House prices in the UK did take a knock in the year following the referendum in everywhere except Scotland. The average house price across the UK has remained fairly high and is currently around £228,000.

A row of typical British homes (Photo: Toa Heftiba / Unsplash)

If you are moving to the UK and wondering whether to buy or rent a home, there are pros and cons for each. Your decision depends on your own personal preferences and circumstances. Renting offers greater flexibility but less stability. Renting costs can be high, especially in the bigger cities, but is often a more viable move in the early period before you have decided where you want to settle. Read this guide to renting versus buying in the UK, which explains some of the key considerations.

Who can get a mortgage in the UK?

There are no legal restrictions on any adults getting a mortgage in the UK. Foreigners can take out mortgages in the UK whether resident or non-resident, although exact terms will vary depending on individual lenders. Each bank or building society will have their own set of requirements, but in general the main factors that are taken into consideration are:

  • Age: As mortgages are essentially home loans that are paid off over a long period, it’s more difficult for older age groups to take out a mortgage in the UK. Most banks and building societies won’t flat-out refuse older applicants, but they will probably ask for a bigger initial deposit and limit the amount of time given to repay the mortgage.
  • Income and job security: Lenders will need to be confident that mortgage payments will be met and will calculate the risks when offering mortgages. This can put self-employed workers and freelancers at a disadvantage. You’ll need to show proof of earnings and the amount you can borrow depends on the amount the mortgage lender feels you can pay back.
  • Credit score: As with loans and other forms of credit in the UK, your credit history will be checked to determine whether you are eligible for a mortgage. If you have bad credit or a low credit score, lenders may be reluctant to grant you a mortgage. The best thing to do in these situations is to spend a few months trying to boost your score (e.g., paying off any outstanding debts, making sure you’re listed on the electoral register).

Getting a mortgage as a foreigner in the UK

Foreigners, both resident and non-resident, can legally buy property and obtain a mortgage in the UK. However, for non-residents and non-EU/EFTA nationals, the process for mortgages in the UK can be a bit more complicated. It’s a lot easier to get a mortgage in the UK if you:

These requirements are generally in place to ensure that the applicant has built up a good credit history in the UK. Non-residents and those who don’t meet these requirements still have the option of taking out a non-status mortgage (also referred to as a self-certification mortgage) where you have to pay a deposit of at least 25%.

Types of mortgages in the UK

The variety of mortgage products available in the UK may be overwhelming to those unfamiliar with mortgages. The main two types of mortgages in the UK are the fixed-rate and variable mortgages. There are also a few specialist types for different circumstances. Here is a brief overview of the main types of mortgages in the UK.

Fixed-rate mortgages

These mortgages come at fixed-rate interests for periods of normally two or five years. The interest rate will usually then move onto the lender’s standard variable rate at the end of the fixed-rate period. Fixed-rate mortgages are popular with UK home-buyers, with around 75% of mortgages in the UK granted as fixed-rate mortgages.The standard variable rate can be much more expensive, so homeowners often remortgage their property at the end of the fixed-rate period. Lenders usually offer mortgages for terms of around 25 years; however, shorter mortgages (e.g., 15 or 20 years) and longer mortgages (e.g., 30 or 35 years) can be negotiated.

Variable rate mortgages

Variable rate mortgages can fluctuate and are dependent on the general interest rate. This makes them more risky than fixed-rate mortgages in the UK, but they can be beneficial if interest rates suddenly drop. Many variable rate mortgages are standard variable rate (SVR), which is a rate set by individual lenders and can change at any time (e.g., after a rise or fall in the base rate set by the Bank of England).

Discount mortgages

This is a form of SVR mortgage but with a discount applied to the SVR for a limited period of time (usually for around 2–3 years). When you shop around for mortgages in the UK, you’ll need to calculate the discount as well as the SVR mortgage rate applied by the lender.

Tracker mortgages

These SVR mortgages track the interest rate from another source (usually the Bank of England) and can be beneficial in terms of avoiding a sudden hike applied by your individual lender.

Capped rate mortgages

This means that the interest rate is capped on a variable rate mortgage and can’t rise above a certain amount. Some capped rate mortgages are only offered at a higher standard rate than other variable rate mortgages in the UK.

Offset mortgages

These mortgages are linked to your savings so that the balance on your savings account is used to reduce the amount of interest charged on your mortgage. Offset mortgages can either lower monthly payments or shorten the length of the mortgage term.

See Expatica’s listings of UK mortgages providers, banks, and financial advisors in the UK.

Mortgages in the UK for other purposes

Mortgages in the UK are also available for purposes other than buying the home you intend to live in, including the following scenarios:

  • You want to buy a second home or holiday home: You can take out a second mortgage using your existing home as security. You can use the equity (the value amount of the existing property that you have paid off) against a new loan. For example, if your home is worth £250,000 and you have £150,000 left to pay on your mortgage, you have £100,000 in equity which you can borrow for a second mortgage. Second mortgages are sometimes used by home-owners to raise capital for purposes other than buying a second home, such as home renovation.
  • You want to buy a property to rent out: You can take out a buy-to-let mortgage which allows you to buy the property as an investment without needing to provide the full amount to buy it outright. You then cover the mortgage and other costs through rental payments from tenants. Many buy-to-let mortgages are interest-only, meaning that you only pay off the interest. You then pay off any outstanding balance at the end of the mortgage (e.g., 25 years), perhaps through selling the property. Repayment buy-to-let mortgages are also available but are more expensive; thus, higher rents need to be charged.
  • If you’re looking to acquire a business property: You can take out a commercial mortgage if you want to buy a property for business use in the UK. Commercial mortgages are very similar to domestic mortgages in the UK. You’ll usually need to provide a deposit of around 25%.

Mortgage rates in the UK

The UK property market has slowed somewhat over the last year, as uncertainty continues around Brexit. Despite this, property prices are still just about on the rise. In January 2019, average house prices increased by 0.1%, to reach £211,966.

In general, mortgage rates in the UK have come down in the last 5 years. As of March 2019, the average interest rates for a UK mortgage are 1.68% (two-year fixed-rate), 2% (three-year fixed-rate), 2.04% (five-year fixed-rate), 2.58% (10-year fixed-rate), and 1.6% (two-year variable). The cheapest deals are generally available to buyers with a deposit of at least 40%. However, it’s possible to secure a fixed-rate mortgage of below 2% on a loan of up to 90% of the value of a property.

Although 100% mortgages don’t currently exist in the UK, there are some no-deposit products that require a parent or family member to act as a guarantor.

An elegant home in London (Photo: Evelyn Paris / Unsplash)

If you’re considering investing in a buy-to-let property, you’ll find mortgage rates of around 3–3.5%. You’ll need to familiarize yourself with the various taxation rules around property investment, including the 3% stamp duty surcharge. Generally speaking, buy-to-let mortgages involve more stringent affordability testing; as such, you may need a bigger deposit than if you were buying an owner-occupier property.

To find out more, check out our full guide on buying a property in the UK.

How much can you borrow?

The UK mortgage system considers each borrower’s circumstances as unique. As a result, you might find some lenders who are willing to offer you a bigger loan than others. There are over 50 mortgage lenders in the UK; it can pay to shop around for the best rates.

In general, there are three primary factors that UK mortgage lenders will weigh up before making you an offer:

  • Your total household income: As a rule, you can usually borrow up to 4.5 times your annual household income (sometimes five times for certain professions); this will depend on your credit history. Mortgage lenders factor in all outgoings, including credit cards, loans, memberships, and day-to-day spending costs when calculating the amount they can offer.
  • The value of the property: In general, loan-to-value (LTV) mortgage ratios range from 50% for buy-to-let investors, home movers and second mortgages to up to 95% for first-time buyers. Generally, the bigger deposit you have, the better rate you can get. The critical issue, though, is what the lender thinks the property is worth. Before you’re offered a mortgage, a full valuation will be carried out.
  • The lender’s estimate of what you can afford: This is where your unique circumstances are considered: your records of cash inflow/outflow and your current available assets.

UK mortgage calculators

Many online UK mortgage calculators only ask for your income. After calculating the appropriate multiple, they refer visitors to discuss their unique situation with a mortgage lender.

This affordability calculator and this mortgage calculator will help align your borrowing expectations with your lender’s capacity to meet your financing needs.

How to apply for a mortgage in the UK

You can apply for a mortgage directly from a bank or building society. Alternatively, you can use a mortgage broker or independent financial adviser or mortgage broker who can compare different mortgages in the UK. Before applying for a UK mortgage, check with the three credit reporting bureaus – Callcredit, Equifax, and Experian – and ask for a free credit report to make sure there are no reporting errors. It’s a good idea to then speak to a few mortgage advisers to help you choose the right mortgage option. These can include advisers within banks or building societies, or you can speak to an independent financial adviser or mortgage broker.

Then you will need to start gathering the documentation your lender could ask for, including:

  • Pay slips from the last three months
  • Proof of your residency status (if applicable)
  • A P60 (annual tax summary) form from your employer
  • Three to six months of bank statements
  • Proof of any government, pension, or insurance benefits received
  • Two to three years of verified accounts if you are self-employed
  • Tax returns (last year and previous year)
  • Current utility bills
  • Passport or other form of identification
  • Household cash flow statements

In general, it usually takes around 18–40 days for a mortgage application to be processed. This can be longer for complex applications.

Banks offering mortgages to expats in the UK

There are a number of UK banks and building societies offering both fixed-rate and variable mortgages, including:

  • Barclays
  • Halifax
  • HSBC
  • NatWest
  • Santander

Finding a mortgage adviser in the UK

There are many different mortgage advisers, mortgage brokers and mortgage advice companies operating the the UK. If you want to use an independent broker, check that they are listed on the Financial Conduct Authority (FCA) register. To find an adviser, you can use these websites:

Help with getting a mortgage in the UK

There are a number of different government schemes to help people to buy a home in the UK. These are:

  • Help to Buy: This is an equity loan scheme to help first-time buyers purchase a new-build home. You can borrow up to 20% of the purchase price (on homes valued up to £600,000) interest-free for the first five years as long as you have a deposit of at least 5%. In London, you can borrow up to 40%. This scheme is available in England. There are comparable schemes in Scotland, Wales, and Northern Ireland.
  • Shared Ownership: This is a scheme where you buy part of the property and rent the remaining share at a reduced rate. This is available to those with household incomes under £80,000 (or £90,000 in London). There are special shared ownership schemes to help older people and those with disabilities to buy a home.
  • Starter Home scheme: This is a new government plan where 200,000 new-build homes are available at a discount rate of at least 20% off market price to first-time buyers under the age of 40.
  • Right to Buy: This is for social housing tenants in England, Wales, and Northern Ireland who have rented their home for at least three years. They can buy their home at a discount rate. The size of the discount depends on location and property type.

If you have bad credit, it’s harder to get a mortgage in the UK. In this case, your best option is to spend some time improving your credit rating. However, there are lenders who offer what are known as bad credit mortgages. These are usually offered at sub-prime rates where you have to pay a deposit of at least 25% (sometimes 30–35%).

Costs of mortgages in the UK

In addition to interest rates on mortgage payments, there are a number of other associated fees that can add few thousand pounds to total costs. These fees include:

  • Arrangement fee: This is an administration fee. Lenders charge this for setting up the mortgage. It can be anything from a few hundred pounds to around £2,000.
  • Booking fee: This is an upfront fee for booking your mortgage. It usually isn’t refundable if the mortgage falls through or you pull out. The cost is usually around £100.
  • Valuation fee: This pays for the lender to carry out a survey to value the property. Costs can vary greatly depending on property value, but they’re usually between £150 and £1,500. Some lenders may agree to waive this fee or include it in with the administrative costs.
  • Survey fees: You can also pay to have your own survey carried out if you wish. The costs for this are usually around £400–500.
  • Transfer fee: Also sometimes called CHAPS (Clearing House Automated Payment System), this fee pays for your mortgage provider to transfer the money to your solicitor. Thankfully, it’s a good deal cheaper than the transfer fees associated with football, usually costing around £25–50.
  • Higher lending charge: This only sometimes applies where a small deposit is paid. It covers the lender’s insurance if you can’t pay back the mortgage and have to sell at a loss. The fee is usually around 1.5% of the mortgage.
  • Solicitor fees: This is the cost of your own solicitor. Most solicitors will charge a percentage of the mortgage price although some may agree to a separate fixed fee. Expect to pay around £1,000 or more. Solicitors may include the stamp duty costs in with their legal fees bill.
  • Mortgage broker fee (if used): If you hire a broker, expect to pay around £500.

Paying mortgage fees in the UK

The fees listed above need to be paid either upfront or shortly after taking out your UK mortgage. Afterwards, you’ll often have to pay an exit fee after repaying your mortgage. This is regardless of whether you pay the mortgage back early or on time. Some lenders include this fee in with upfront/administrative costs; check if you’re not sure. Some lenders also charge an early repayment fee if you pay off your mortgage early. This is typically between 1–5% of the value of the early repayment.

Taxes and relief on mortgages in the UK

The biggest additional expense of buying a home in the UK is stamp duty. It is also known as land and buildings transaction tax in Scotland and land transaction tax in Wales.

All owner-occupiers need to pay stamp duty on any property valued at more than £125,000 in England or Northern Ireland (£175,000 in Scotland, £180,000 in Wales). The tax payable ranges from 2% to 12% depending on the purchase price. It’s usually due within 14 days of finalizing your property purchase.

Buyers purchasing a second home or buy-to-let property need to pay additional 3% surcharge on top of the standard rate.

In early 2019, the UK government launched a consultation on charging a higher rate of stamp duty to overseas purchasers. At time of writing, however, no legislation has come into force.

Capital gains tax

If you sell a property that isn’t your main residence, you’ll have to pay capital gains taxes on any profit made within 30 days of finalizing the sale (both for rental and non-rental properties).

Changes to capital gains policy came into effect in April 2015; prior to this, non-residents had no capital gains liability. The good news, however, is that non-residents only need to calculate gains made since April 2015.

Tax considerations on buy-to-let mortgages

In the last few years, a series of new tax rules came into force for buy-to-let investors in the UK, as the UK government and Bank of England looked to cool the property market. The biggest taxation changes for landlords came in the form of mortgage interest tax relief cuts. Previously, investors could deduct their mortgage expenses from their rental income, before calculating their tax bills.

Between now and April 2020, however, new rules are being phased in. These result in landlords being given a 20% tax credit. Until then, you can claim tax relief on the following amount of mortgage interest:

  • 2017–2018 tax year: 75%
  • 2018–2019 tax year: 50%
  • 2019–2020 tax year: 25%

You can find out more in the guide on mortgage tax relief from the UK government.

Property insurance in the UK

Although not a legal requirement, building insurance is usually required by most lenders when taking out mortgages in the UK; you’ll need to budget for this. This insurance normally costs around £150–200 a year. Many banks in the UK offer this insurance; if you’re getting a mortgage in the UK from a bank, you might be able to include this in. If you’re buying a property to let out, building insurance is a legal requirement. Another insurance worth looking into is home contents insurance. See our guide to insurance in the UK for details on insurance forms available.

Mortgage repayments in the UK

You will have to start making payments on your UK mortgage the month after you buy the property. Your mortgage repayment consists of the amount paid towards the mortgage loan and the amount of interest paid. This is unless you have an interest-only mortgage, in which case you will pay off the interest only and then have to settle the amount borrowed for the mortgage at the end of the term. You can usually renegotiate your UK mortgage with your lender at any point by switching to another mortgage, remortgaging, renegotiating the payment period, or even switching to another lender. Bear in mind, however, that this may involve extra administration fees.

If you run into difficulty with mortgage repayments, contact your lender to see if it can be sorted out. You can also get free debt advice at Citizens Advice or the National Debtline. In Scotland and Wales, you might be able to get help through a mortgage rescue scheme or support fund.

Refinancing mortgages in the UK

Refinancing a mortgage is the process of taking out a new mortgage to pay off your existing mortgage. It is different from taking out a second mortgage that you will pay alongside your existing mortgage. You might want to refinance your mortgage to shorten your payment period, lower your interest rate, or free up some equity to invest in something else. In the UK, you can usually refinance your mortgage by taking out a new mortgage with the same lender or a different one.

You’ll need to calculate the fees that you will incur, which will include many of the same fees as for your existing mortgage plus possible early repayment fees. It’s advisable to speak to a financial expert first to discuss the merits of refinancing your UK mortgage.

Useful resources

  • Help to Buy: Government support for first-time buyers and others finding it difficult to buy in the UK.
  • Money Advice Service: Advice on buying a home and getting a mortgage in the UK.