The decision is just as important if you’re just switching to a new mortgage deal when your current one is ending.
When you’re looking for a mortgage lender, the best bank or building society for you will depend on a number of factors.
Once you’ve decided which type of mortgage you want to go for, whether it’s a fixed-rate or variable-rate deal, you’ll probably be looking at which banks are offering the lowest interest rates.
However, you should also take the set-up fees into account and look at the overall cost of your mortgage. This includes the monthly repayments plus the fees during the initial deal period, after which your rate reverts to the lender’s standard rate and you are free to switch to a new deal. A lower interest rate doesn’t necessarily mean a cheaper deal overall.
Depending on your circumstances, other considerations when choosing a lender include its approach to self-employed people, the maximum amount it will lend you, whether it offers mortgages to people with a poor credit history and whether it offers special products such as guarantor mortgages.
The 10 largest mortgage lenders in the UK according to industry body UK Finance, based on those that lent the most in 2019, are:
Lloyds Banking Group (including Halifax and Scottish Widows)
NatWest Group (including Royal Bank of Scotland)
HSBC Bank (including First Direct)
Virgin Money Plc (including Clydesdale and Yorkshire Banks)
You might feel more comfortable going for a brand you know, and the biggest lenders are likely to offer the biggest choice of mortgage products, but you should look at the whole market to find the best deal for you, especially if you have more unusual circumstances. Speaking to an independent mortgage adviser is the best way to do this.
Some of the smaller building societies frequently offer good deals and there are also specialist lenders that might offer what you need.
The mortgage deals on offer change quickly so the banks and building societies offering the best interest rates and overall deals today won’t necessarily be the same tomorrow.
Big names you might find in best buy tables if you want a fixed-rate mortgage include Barclays, Nationwide, NatWest, Royal Bank of Scotland and Virgin Money, and for variable rates they might include Clydesdale and Yorkshire Banks.
However, you should always check the best mortgage rates and deals yourself or speak to a mortgage adviser before choosing a lender (although there are a few lenders that don’t offer their mortgages through advisers).
The vast majority of mortgages taken out are fixed rates – around 85% to 92% since the beginning of 2017 according to data compiled by the Financial Conduct Authority.
The amount you can borrow is based on the loan-to-value (LTV) – the proportion of the value of the property you are buying or own – as well as what you can afford to pay back.
There are now very few lenders offering mortgages above 90% LTV although there are some products available that let you borrow more than this if you have help from family or friends. For example, they can put aside some of their savings as security for your loan or agree to a percentage charge on their own property.
The lower your LTV the cheaper your mortgage is likely to be, so the more deposit you can save the better. You should also bear this in mind when deciding how much to spend on a property or how much to borrow when you’re looking for a remortgage deal.
Lenders used to have different rules on how much of your earnings you can borrow (the loan-to-income ratio) but overall affordability is now the most important test – lenders will look at your income and outgoings to decide what you can afford.
Since changes to mortgage rules in 2014, it’s more difficult to borrow more than four-and-a-half times your individual or joint salary.
Mortgage lenders offering deals specifically targeting first-time buyers that let you borrow up to 100% of the property’s value include Buckinghamshire Building Society with its Family Assist mortgage for borrowers in England and Wales. Your parents or grandparents can use up to 60% of the equity in their home to guarantee your mortgage by having a charge placed on it. You can also choose to have a mortgage term of up to 40 years.
Barclays’ Family Springboard mortgage lets family or friends put aside some of their savings to the value of 10% of the property price to act as security for your loan. They get their money back plus interest after five years and you can then continue with your mortgage without their help.
Tipton & Coseley Building Society’s Family Assist mortgage combines the features of the Buckinghamshire and Barclays mortgages. Your relatives can either have a charge put on their property for 20% of the amount you are borrowing or put aside the 20% from their savings.
If you’re self-employed you have access to the same mortgage deals as an employed person but you’ll need to supply more evidence to prove you have a reliable income, such as 2 or more years’ of accounts, which should be prepared by an accountant, tax documents and evidence of work coming up or income sources.
It will be harder to get a mortgage if you have accounts for less than 2 years but, as with taking out any mortgage, the more deposit you have and the better your credit history, the greater your chances of success.
Lending and affordability criteria for self-employed people will vary between lenders and depend on whether you are a sole trader or in a partnership, or have a limited company.
A mortgage adviser will be able to help you find a bank or building society with criteria that best suit your circumstances. This also reduces your chances of being rejected for a mortgage, which can damage your credit score.
If you have a poor credit history, because you’ve missed mortgage, loan or credit card payments, had county court judgements against you for not paying off debt or been bankrupt for example, your choice of mortgage lenders will be more limited. However, many mainstream lenders will still lend to people with bad credit and have different levels of credit problems they are prepared to accept.
Here are examples of what some of the biggest lenders say they will accept or ignore when assessing your credit history:
If you’re not a first-time buyer, bankruptcy if you were discharged at least 6 years ago.
If you’re not a first-time buyer, an IVA (individual voluntary arrangement – an agreement you make with your creditors to pay off your debts over time) if it was completed at least 6 years ago.
County court judgements more than 3 years old are only considered on a case-by-case basis.
Bankruptcy or an IVA, debt management arrangement or debt relief order registered more than 6 years ago.
County court judgements more than 6 years ago.
Bankruptcy if you have been discharged for more than 3 years.
Bankruptcy order or an IVA if it was more than 6 years ago.
It will consider applicants who have missed unsecured loan payments in the past.
If you have more serious credit problems, you may need to go to a specialist lender that specifically caters for people with a poor credit history. Speak to a mortgage adviser to find one that is likely to lend to you.
If you would like a mortgage with flexible features, such as the ability to over or underpay your mortgage, take payments holidays or borrow money back that you’ve overpaid, you may want to look at specific lenders that offer these types of products. However, most lenders will let you overpay by a certain amount each year, often up to 10%. This could help you pay off your mortgage early and save on interest.
Offset mortgages let you offset your savings against your mortgage to save on interest. For example, if you have a mortgage for £200,000 and £20,000 in savings you only pay interest on £180,000. This interest saving either goes towards reducing your monthly payment or, if you pay the same as you would have paid without offsetting, you’ll end up paying your mortgage off earlier.
Scottish Widows is one lender that offers flexible mortgages. It lets you offset your savings against your mortgage and you can borrow more after 6 months if your mortgage is less than the maximum amount you can borrow.
Lenders to go to for offset mortgages include Barclays, Clydesdale and Yorkshire Banks, Coventry Building Society and Yorkshire Building Society.
If you need a mortgage to buy a property you plan to let out, or you’re remortgaging a buy-to-let property, you’ll need to choose a bank or building society that offers buy-to-let mortgages.
These work differently to residential mortgages. They are usually interest-only so at the end of your mortgage term you’ll need to pay the loan off in full, which you might do by selling the property if its value is high enough.
Interest rates and fees are usually higher than for residential mortgages and you need to put down a bigger deposit of 20% to 40% of the property’s value.
The way lenders work out the maximum amount they are prepared to lend you is also different. Rather than using a percentage of the value of the property you’re buying it’s based on the monthly rental income you expect to get from the property, which may need to be 25% to 45% higher than your mortgage interest payment.
While there are specialist buy-to-let lenders, many of the big banks and building societies offer buy-to-let loans. These include Barclays, Halifax, NatWest, Royal Bank of Scotland and Virgin Money. To get the best deals for smaller deposits you may need to go to specialist lenders. Again, a mortgage adviser can help you find one that suits your circumstances.
Unlike residential mortgages, buy-to-let mortgages are not regulated by the Financial Conduct Authority (unless you are letting the property to a member of your close family) because they are considered to be commercial products. This means different affordability rules apply.