An Introduction to the UK Mortgage Market

How Big is the UK Mortgage Market?

Historically across the United Kingdom, around 65 thousand to 70 thousand mortgages are approved each month. This is from a low of around 30 thousand after the 2008 to 2009 global financial crisis. Prior to the recession, the monthly rate was closer to 80 thousand to 130 thousand mortgages completed each month.

Overall mortgage debt tends to grow around 3% to 6% per annum, though there can be significant fluctuations in that rate of growth due to factors like BREXIT, the global economic crisis which happened in 2008, COVID-19 lockdowns, etc. Segments of the market can change faster than the overall market due to those same sorts of factors along with various legal changes tied to foreign property ownership, the localised balance between immigration and construction, etc.

Market Composition

In the fourth quarter of 2020, 75.8% of gross advances were made for home purchases, while 18.45% of the market was for remortgages. Future advances and the other category round out the market at about 3% each. Breaking down the home purchase figures further, 23.32% were loans to first-time homebuyers, 11.15% were for buy-to-let mortgages, and 39.60% was classified as other.

Looking at new commitments, 71.81% were for home purchases, while 23.59% were for remortgages. The other category, including further advances, comprised 4.60% of new commitments.

Over the past couple of years, 76% to 78% of advances were for capital and interest repayment loans. Meanwhile, 17% to 20% were for interest-only payment loans, and 4% to 6% were structured as combined or other. Regulated loans tend to lean much more heavily toward the capital and interest repayment structure, while non-regulated loans are far more likely to be structured as interest-only deals.

In 2020, when the COVID-19 crisis swept across the globe, economies were forced to slow down. In response, central banks intervened to reduce interest rates and further add liquidity to the market. When interest rates fall, the composition of the United States housing market tends to shift heavily toward refinancing (remortgaging). This is because fixed-rate mortgages in the U.S. are locked for the entire duration of the loan term.

In contrast, the UK market share between purchase and remortgages is much more stable, as fixed-rate mortgages adjust with market conditions after the introductory period. Over the past 3 years, remortgaging has made up between 27.49% to 37.83% of the UK market. The peak came in the second quarter of 2020, after interest rates cratered in response to the COVID-19 crisis. In the fourth quarter of 2020, 18.45% of residential loans to individuals were remortgages.

Fixed & Variable Rates

The standard variable rate (SVR) is the basic interest rate lenders use for mortgages. Each lender sets their default SVR. It’s the default rate mortgages revert to after the introductory period of a loan, which is usually 2 to 5 years. SVR mortgages usually have higher interest rates than other mortgage options.

Standard variable rates move based on fluctuations in the Bank of England base rate. When rates reset higher, borrowers must be prepared to make higher monthly payments. To avoid reverting to the SVR, borrowers would remortgage to a new deal with a favourable rate.

In recent years, standard variable rates have been on the rise. Because of this, many consumers find fixed-rate mortgage options more attractive. According to the Bank of England, since 2016, fixed-rate options are more preferred by borrowers, especially first-time homebuyers.

In the third quarter of 2020, 91.2% of all mortgages used fixed-rate loans. The average fixed-rate mortgage was priced at 1.91%. In contrast, the average variable rate mortgage was priced at 1.85%, bringing the overall market average to 1.91%.

The UK government provides subsidy programs in Help to Buy and Help to Buy London. These government schemes offer mortgage deposit assistance. However, few lenders in the UK provide loans which have fixed rates extending beyond 5 years.

Unsure how your payments may change as rates rise and fall? We provide a UK mortgage amortisation calculator. This allows you to see how changing rates can impact your monthly payments. You can compare interest-only payments and fixed-rate loans side by side. It also generates a printable amortisation schedule of your monthly mortgage payments.

During the introductory period, some banks may limit how much of the loan you can overpay. Meanwhile, lenders allow higher overpayments after the introductory period, when the rate has reverted to the standard variable rate (SVR).

Many borrowers across the UK remortgage their loans when rates reset. This is a big part of why remortgages were nearly 40% of new commitments in 2020. In response to the COVID-19 crisis, when the Bank of England dropped its base rate to 0.1% in March 2020, it helped stimulate market activity and growth. To date, it’s the lowest base rate in the Bank of England’s 325-year history.

A lot of mortgages contain upfront fees that help cover administrative expenses and the cost of offering lower rates. Some loan terms also prohibit borrowers from making advanced payments, particularly in the introductory fixed-rate period.

Loan Deposit and Credit Records

Most borrowers that qualify for financing save substantial funds for deposit. They also have a good credit history showing on-time payments without large outstanding balances. In the fourth quarter of 2020, only 0.37% of mortgages from borrowers with impaired credit history were approved by lenders.

Mortgage Affordability

Baseline Limit

As a baseline, most lenders typically do not lend more than 4.5 times the borrower’s annual income. For example, if you make £50,000 a year, a lender might be willing to grant a loan amount between £150,000 and £225,000. For joint applicants, the limit is usually slightly lower. A lender might offer a full multiple on the first income and then add the second income, or they lower the multiplier across incomes down to 3. Examples are shown in the table below:

In rare cases, lenders may loan up to 5 times the borrower’s annual salary. However, regulatory restrictions limit banks to having no more than 15% of their mortgage loans above the 4.5x multiple. In these cases, lenders can be selective and only choose borrowers with low debt loads that can afford a substantial deposit.

Moreover, lenders review a borrower’s debt load and monthly outgoings. This presumes borrowers spend about 3% to 5% of their debt amount on monthly debt service payments when lenders perform calculations.

Use our mortgage affordability qualification calculator to estimate how much you can qualify for based on your current income.

Bank of England Limitations

In the wake of the 2008 - 2009 financial crisis the Bank of England implemented mortgage affordability testing rules which aimed to stop banks from offering risky loans where the borrower would be unable to repay the reversion rate on the loan if the rate increased by 3%.

In June of 2022 the Bank of England pressed ahead with plans to scrap this mortgage affordability test, though borrowers who are stretched should consider what happens to their finances if rates rise.

General Affordability Assessment Considerations

Each lender considers their own criteria in determining the loan amount for a particular borrower. Different factors play a major role in how much they are willing to lend. These factors include your credit score and history, as well as the stability of your income. They also assess your monthly debt service obligations together with your personal living costs.

Some lenders may focus on your monthly debt service payments and carefully assess your total debt load. A lender may reduce the amount they are willing to offer based on the size of your outstanding debt. Furthermore, if the lender knows you’re expecting a baby in the family, or if you’re taking a career break soon, they may limit their loan offer.

How Much Can I Borrow? Detailed Considerations:

• Loan-to-value: Lenders specify different LTV limits for how much they are willing to loan on each type of loan product. Typically, LTV is the percent of home’s value not covered by your deposit. So if you deposit 25% on a home, that would mean the LTV is 75%.
• Pre-tax income: This consists of your basic income, including pension, other earnings from overtime income, workplace bonuses, and sales commissions. It also considers pensions and any financial support you receive from an ex-spouse. Some lenders count overtime income in full, while others may only count it at a reduced rate of 50%. For those who are self-employed, you must provide additional documentation such as bank statements, business accounts, and recent income tax payments. You must show accounts covering 2 to 3 years of your earnings.
• Outgoing Expenses: This is comprised of regular payments you make each month. It includes utilities, transportation expenses, debt service fees on credit cards and other loans, and basic living costs such as recreation and childcare. It also factors in payments for rent, insurance policies, and council taxes. Beyond the headline numbers, some lenders may lower your total limit for each additional child in the family. If your numbers seem off, a lender may ask to see recent bank statements to verify them.
• Anticipated Personal Living Changes: Lenders consider the risk of job loss, illness, and major life changes such as having a child. It also considers changes when you take a career break to pursue further education.
• Anticipated Market Condition Changes: Lenders want to ensure borrowers will still be able to make payments if interest rates rise in-line with typical historical shifts.

The Impact of COVID-19 On the Property Market

In 2020, the COVID-19 pandemic affected every sector of the economy all over the world. The UK Government published a guide on home moving during the coronavirus outbreak.

In October 6, 2020, Prime Minister Boris Johnson announced a 5% mortgage deposit scheme for first-time home owners. With 5% deposit guaranteed by the government, borrowers can access more mortgage products. This provides options for those who cannot not afford a 10% deposit.

The Bank of England (BoE) cut their interest rate to 0.1% as early as March 19, 2020. In spite of the BoE easing policy, many banks have tightened lending standards.

During lockdowns, far fewer homes were sold across the UK. This led to record sales from pent up demand after the initial lockdown ended.

Property website Rightmove, which says it is used by 90% of British estate agents, reported the highest number of home sales agreed since it began tracking the data more than 10 years ago, with transactions more than 20% higher than the previous record.

The above jump in demand was before the UK government announced a stamp duty holiday in July 2020. After the stamp duty holiday was announced, the property market grew hotter with home prices rising 3.7% in August 2020. Property prices have risen more in areas outside of greater London as many people who formerly worked in the city now have the ability to work from home. They sought more home space with lower living costs. The Fair Oaks, Hampshire and Formby, Merseyside markets have been particularly hot.

The stamp duty holiday was originally scheduled until March 31, 2021. But later on, Chancellor Rishi Sunak officially announced that stamp duty holiday is extended until June 30, 2021. Reduced rates were extended once more until September 30, 2021, however the nil rate band was lowered from £500,000 to £250,000.

You can calculate stamp duty across the UK using the government’s free online tool.

Stamp Duty Holiday

During the stamp duty holiday period, the stamp duty tax threshold was originally raised from £125,000 to £500,000 for property sales throughout England and Northern Ireland. Originally only homebuyers considering properties above the £500,00 threshold were required to pay stamp duty. The temporary tax break encouraged more prospective buyers to purchase homes.

In 2021, roughly 9 in 10 buyers are expected to pay no stamp duty at all. The average stamp duty bill is anticipated to decline by £4,500.

English & Northern Ireland Stamp Duty Rates

The following table shows freehold home stamp duties an individual or couple would pay when they purchase their primary residence.

The discount percentage rate breakdown was originally:

• £500,000 = 0%
• £500,001-£925,000 = 5% of the amount above £500,000
• £925,001-£1,500,000 = 10% of the amount above £925,000 + £33,750 (5% of £675,000)
• £1,500,001 and up = 12% of amount above £1,500,000 along with £33,750 (5% of £675,000) and £57,500 (10% of £575,000)

After June 30, 2021 the percentage rate shifted to

• £250,000 = 0%
• £250,001-£925,000 = 5% of the amount above £250,000
• £925,001-£1,500,000 = 10% of the amount above £925,000 + £21,250 (5% of £425,000)
• £1,500,001 and up = 12% of amount above £1,500,000 along with £21,250 (5% of £425,000) and £57,500 (10% of £575,000)

Second home buyers can also avail of the discounted rates, though they will also be required to pay an extra 3% stamp duty.

Prior to the COVID-19 crisis, stamp duty was paid on any land or property sold for above £125,000. First-time buyers got an exemption on property valued up to £300,000.

Scotland Land and Buildings Transaction Tax Rates

• £145,001-£250,000 = 2%
• £250,001-£325,000 = 5%
• £325,001-£750,000 = 10%
• £750,001 and up = 12%

Scottish landlords pay an additional 4%.

Scotland ended their discount at the end of March 2021.

Wales Land Transaction Tax

• £180,001-£250,000 = 3.5%
• £250,001-£400,000 = 5%
• £400,001-£750,000 = 7.5%
• £750,001-£1,500,000 = 10%
• £1,500,000 and up = 12%

Welsh landlords pay an additional 3%.

Wales ended their tax discount at the end of June 2021.

Buyers across the UK rushed to take advantage of the stamp duty holiday. Mortgage approvals rose in 2020 ahead of the holiday deadline. According to data from the Bank of England, mortgage approval drastically increased especially after the initial lockdown.

That manic surge has been attributed to a number of components, including eager buyers looking to upgrade their homes to better suit their new lifestyles, which now frequently involve more time at home and remote working.

The following graph illustrates the changing mortgage approval levels in 2020. It includes data from February 2020 to January 2021. Before lockdown was lifted in May 2020, UK mortgage approvals reached as low as 9.3 thousand. However, approvals surged to 40.3 thousand in June 2020 as businesses began reopening. Mortgage approvals reached its peak in November 2020 at 104.9 thousand. This gradually decreased to 98.9 thousand by January 2021.

Historical Monthly UK Mortgage Approval Statistics

The following table from the Building Societies Association shows historical UK mortgage data going back to January 1999. From 2010 onward the data reflects all UK mutual lenders. Before 2010 the data reflects the UK building society sector. The August 2009 data does not include Britannia data.

Period	House Purchase	Remortgaging	Other	Total
Jan 1999	50,434	14,407	26,930	91,771
Feb 1999	78,439	28,524	36,392	143,355
Mar 1999	111,482	40,438	47,717	199,637
Apr 1999	108,234	33,669	41,193	183,096
May 1999	104,691	31,698	38,526	174,915
Jun 1999	119,408	34,294	46,593	200,295
Jul 1999	113,727	33,600	44,688	192,015
Aug 1999	99,052	34,444	42,735	176,231
Sep 1999	100,921	29,399	45,567	175,887
Oct 1999	99,135	31,428	42,472	173,035
Nov 1999	90,985	26,076	43,719	160,780
Dec 1999	67,651	21,928	31,450	121,029
Jan 2000	50,816	22,506	27,673	100,995
Feb 2000	87,861	32,344	38,425	158,630
Mar 2000	118,265	37,838	47,678	203,781
Apr 2000	99,600	33,427	37,105	170,132
May 2000	110,890	39,559	42,645	193,094
Jun 2000	115,175	39,973	55,503	210,651
Jul 2000	98,182	36,042	55,498	189,722
Aug 2000	93,810	36,206	50,260	180,276
Sep 2000	92,961	35,947	45,976	174,884
Oct 2000	92,562	39,214	47,913	179,689
Nov 2000	92,533	43,045	48,826	184,404
Dec 2000	70,702	37,474	41,469	149,645
Jan 2001	66,306	42,715	52,350	161,371
Feb 2001	85,361	49,850	56,583	191,794
Mar 2001	120,429	68,697	70,140	259,266
Apr 2001	108,794	58,821	62,581	230,196
May 2001	128,046	66,717	68,549	263,312
Jun 2001	130,888	66,706	73,230	270,824
Jul 2001	128,170	70,554	73,174	271,898
Aug 2001	118,230	60,255	72,912	251,397
Sep 2001	97,882	55,778	66,764	220,424
Oct 2001	104,043	65,801	77,859	247,703
Nov 2001	99,448	72,152	76,901	248,501
Dec 2001	74,184	63,927	54,722	192,833
Jan 2002	81,940	72,098	68,075	222,113
Feb 2002	108,314	73,083	71,214	252,611
Mar 2002	130,848	76,175	83,401	290,424
Apr 2002	141,604	83,115	90,295	315,014
May 2002	153,080	97,438	100,321	350,839
Jun 2002	120,191	80,099	78,006	278,296
Jul 2002	139,561	94,906	97,354	331,821
Aug 2002	113,903	89,028	93,297	296,228
Sep 2002	113,313	92,396	97,970	303,679
Oct 2002	126,705	106,578	110,229	343,512
Nov 2002	115,388	109,832	102,659	327,879
Dec 2002	80,329	92,715	80,456	253,500
Jan 2003	73,899	91,940	94,888	260,727
Feb 2003	86,255	97,212	104,014	287,481
Mar 2003	107,878	126,257	121,989	356,124
Apr 2003	110,987	132,739	109,845	353,571
May 2003	115,161	115,125	115,478	345,764
Jun 2003	124,018	115,858	122,971	362,847
Jul 2003	133,549	121,018	129,156	383,723
Aug 2003	120,630	110,270	116,395	347,295
Sep 2003	131,134	123,465	125,020	379,619
Oct 2003	137,731	131,176	131,649	400,556
Nov 2003	122,431	117,817	106,169	346,417
Dec 2003	99,009	96,015	85,674	280,698
Jan 2004	83,620	86,969	88,908	259,497
Feb 2004	110,097	101,717	104,720	316,534
Mar 2004	148,673	128,075	123,574	400,322
Apr 2004	131,047	106,883	103,424	341,354
May 2004	132,844	103,878	101,982	338,704
Jun 2004	136,507	118,847	105,376	360,730
Jul 2004	111,711	116,432	102,523	330,666
Aug 2004	93,902	105,430	95,268	294,600
Sep 2004	88,803	103,326	96,568	288,697
Oct 2004	85,758	102,289	79,839	267,886
Nov 2004	74,175	92,371	78,790	245,336
Dec 2004	62,708	79,831	62,053	204,592
Jan 2005	50,854	78,082	66,917	195,853
Feb 2005	73,775	89,630	77,756	241,161
Mar 2005	103,905	105,234	84,032	293,171
Apr 2005	109,552	102,797	86,307	298,656
May 2005	108,051	98,038	82,253	288,342
Jun 2005	116,264	108,635	84,637	309,536
Jul 2005	106,238	108,533	76,623	291,394
Aug 2005	108,360	115,761	82,955	307,076
Sep 2005	108,427	119,698	84,639	312,764
Oct 2005	107,949	117,477	78,915	304,341
Nov 2005	113,898	112,403	79,263	305,564
Dec 2005	88,537	85,282	59,145	232,964
Jan 2006	77,567	81,996	69,027	228,590
Feb 2006	97,161	96,494	72,829	266,484
Mar 2006	142,606	117,695	85,685	345,986
Apr 2006	109,001	88,989	68,018	266,008
May 2006	137,406	104,805	78,971	321,182
Jun 2006	146,854	108,794	84,189	339,837
Jul 2006	125,734	98,525	74,867	299,126
Aug 2006	125,861	99,980	82,514	308,355
Sep 2006	125,078	96,499	78,309	299,886
Oct 2006	129,442	108,850	79,583	317,875
Nov 2006	127,605	115,692	81,620	324,917
Dec 2006	82,886	78,090	54,556	215,532
Jan 2007	80,232	86,974	74,900	242,106
Feb 2007	101,166	107,980	72,944	282,090
Mar 2007	133,194	112,527	81,078	326,799
Apr 2007	110,529	91,654	69,601	271,784
May 2007	136,974	117,774	79,700	334,448
Jun 2007	136,433	109,251	75,191	320,875
Jul 2007	126,176	106,577	74,513	307,266
Aug 2007	114,662	99,835	69,244	283,741
Sep 2007	96,955	100,781	64,945	262,681
Oct 2007	92,506	97,664	64,720	254,890
Nov 2007	80,752	97,046	61,433	239,231
Dec 2007	49,891	76,272	39,388	165,551
Jan 2008	48,706	100,248	53,790	202,744
Feb 2008	63,544	109,532	61,630	234,706
Mar 2008	61,861	95,179	50,918	207,958
Apr 2008	65,023	113,443	52,696	231,162
May 2008	46,711	90,656	45,670	183,037
Jun 2008	41,557	85,249	44,742	171,548
Jul 2008	38,992	76,454	47,141	162,587
Aug 2008	32,075	60,798	37,951	130,824
Sep 2008	34,145	71,047	39,269	144,461
Oct 2008	34,293	79,705	35,650	149,648
Nov 2008	24,752	41,171	29,076	94,999
Dec 2008	22,954	29,017	24,761	76,732
Jan 2009	21,466	26,915	30,357	78,738
Feb 2009	34,597	31,631	31,857	98,085
Mar 2009	47,804	36,073	33,713	117,590
Apr 2009	48,248	32,156	27,881	108,285
May 2009	52,350	31,399	28,079	111,828
Jun 2009	61,611	36,837	32,527	130,975
Jul 2009	63,317	36,810	30,722	130,849
Aug 2009	50,957	24,508	25,268	100,733
Sep 2009	59,218	26,299	30,235	115,752
Oct 2009	58,818	24,653	29,523	112,994
Nov 2009	55,949	24,739	26,865	107,553
Dec 2009	42,628	23,194	20,220	86,042
Jan 2010	29,721	18,941	20,029	68,691
Feb 2010	40,582	27,832	25,697	94,111
Mar 2010	57,897	33,791	30,027	121,715
Apr 2010	53,602	26,540	24,744	104,886
May 2010	53,900	26,022	23,995	103,917
Jun 2010	60,422	30,042	27,512	117,976
Jul 2010	55,433	29,048	25,848	110,329
Aug 2010	47,744	26,083	24,063	97,890
Sep 2010	49,573	29,638	25,361	104,572
Oct 2010	47,647	29,211	23,224	100,082
Nov 2010	47,551	36,323	22,897	106,771
Dec 2010	31,095	25,756	15,237	72,088
Jan 2011	27,319	25,951	17,130	70,400
Feb 2011	40,302	37,670	20,330	98,302
Mar 2011	57,095	39,692	23,701	120,488
Apr 2011	47,138	26,736	18,621	92,495
May 2011	52,450	29,179	21,018	102,647
Jun 2011	59,706	35,178	22,558	117,442
Jul 2011	55,373	32,075	20,886	108,334
Aug 2011	55,564	33,224	22,435	111,223
Sep 2011	54,008	34,313	22,323	110,644
Oct 2011	52,218	33,531	20,949	106,698
Nov 2011	54,644	34,198	21,539	110,381
Dec 2011	37,560	25,501	15,313	78,374
Jan 2012	37,253	26,219	16,982	80,454
Feb 2012	44,968	30,140	19,575	94,683
Mar 2012	58,355	34,358	20,555	113,268
Apr 2012	51,734	29,855	17,082	98,671
May 2012	60,152	30,377	19,143	109,672
Jun 2012	51,890	24,719	16,032	92,641
Jul 2012	53,880	25,906	16,639	96,425
Aug 2012	51,112	25,473	16,471	93,056
Sep 2012	48,860	28,046	15,924	92,830
Oct 2012	57,420	32,126	16,480	106,026
Nov 2012	56,182	31,072	14,969	102,223
Dec 2012	38,062	22,099	10,443	70,604
Jan 2013	37,248	22,575	12,360	72,183
Feb 2013	45,103	27,456	12,602	85,161
Mar 2013	55,510	31,856	13,095	100,461
Apr 2013	61,829	34,170	13,433	109,432
May 2013	68,683	33,744	14,263	116,690
Jun 2013	65,188	31,757	13,355	110,300
Jul 2013	70,221	36,813	14,299	121,333
Aug 2013	64,226	34,279	13,264	111,769
Sep 2013	67,172	35,683	13,041	115,896
Oct 2013	75,815	40,401	14,380	130,596
Nov 2013	71,952	36,345	13,380	121,677
Dec 2013	52,657	28,338	10,218	91,213
Jan 2014	53,687	31,420	12,107	97,214
Feb 2014	60,719	32,840	12,356	105,915
Mar 2014	73,356	36,687	13,134	123,177
Apr 2014	67,068	31,772	11,846	110,686
May 2014	69,277	28,633	9,365	107,275
Jun 2014	77,272	32,197	10,569	120,038
Jul 2014	77,757	36,772	12,057	126,586
Aug 2014	64,137	30,448	9,581	104,166
Sep 2014	64,546	32,164	9,914	106,624
Oct 2014	66,950	35,864	10,203	113,017
Nov 2014	57,897	32,725	9,117	99,739
Dec 2014	46,059	28,554	8,115	82,728
Jan 2015	41,687	26,843	7,933	76,463
Feb 2015	53,841	31,580	9,145	94,566
Mar 2015	70,238	38,339	10,807	119,384
Apr 2015	70,499	36,522	10,900	117,921
May 2015	69,733	35,192	10,988	115,913
Jun 2015	81,112	39,841	12,315	133,268
Jul 2015	82,731	42,761	12,422	137,914
Aug 2015	69,833	39,359	11,805	120,997
Sep 2015	74,149	43,713	13,129	130,991
Oct 2015	74,580	43,720	13,104	131,404
Nov 2015	70,383	41,742	12,414	124,539
Dec 2015	54,819	36,576	10,318	101,713
Jan 2016	49,700	34,301	10,254	94,255
Feb 2016	66,250	41,621	13,099	120,970
Mar 2016	77,609	45,043	14,183	136,835
Apr 2016	72,660	42,985	13,855	129,500
May 2016	74,217	43,488	13,409	131,114
Jun 2016	78,557	46,852	13,737	139,146
Jul 2016	67,727	44,908	13,070	125,705
Aug 2016	64,389	42,418	13,203	120,010
Sep 2016	66,905	45,700	14,447	127,052
Oct 2016	68,175	46,143	13,986	128,304
Nov 2016	71,336	50,807	14,293	136,436
Dec 2016	50,460	40,601	10,693	101,754
Jan 2017	48,505	39,596	12,043	100,144
Feb 2017	61,064	42,296	13,386	116,746
Mar 2017	80,339	50,382	15,820	146,541
Apr 2017	63,293	37,198	12,583	113,074
May 2017	75,135	45,351	14,750	135,236
Jun 2017	78,891	48,712	14,914	142,517
Jul 2017	73,221	48,429	15,664	137,314
Aug 2017	70,491	46,889	14,575	131,955
Sep 2017	66,228	48,050	14,029	128,307
Oct 2017	67,946	56,379	14,603	138,928
Nov 2017	67,872	60,137	14,793	142,802
Dec 2017	43,818	38,344	10,439	92,601
Jan 2018	49,411	43,497	12,152	105,060
Feb 2018	57,019	44,109	13,160	114,288
Mar 2018	67,004	47,318	14,439	128,761
Apr 2018	66,254	46,937	13,404	126,595
May 2018	74,586	53,279	14,239	142,104
Jun 2018	76,455	49,250	15,098	140,803
Jul 2018	72,160	47,952	17,167	137,279
Aug 2018	70,507	53,947	15,419	139,873
Sep 2018	62,852	47,621	14,711	125,184
Oct 2018	73,674	57,038	15,521	146,233
Nov 2018	66,947	54,338	15,189	136,474
Dec 2018	44,510	38,330	9,715	92,555
Jan 2019	49,669	45,125	13,521	108,315
Feb 2019	58,628	46,314	13,794	118,736
Mar 2019	67,911	52,119	15,187	135,217
Apr 2019	67,368	46,907	14,059	128,334
May 2019	75,377	47,517	15,636	138,530
Jun 2019	73,651	45,745	14,670	134,066
Jul 2019	78,065	52,644	15,952	146,661
Aug 2019	67,088	48,470	14,837	130,395
Sep 2019	65,176	49,953	14,880	130,009
Oct 2019	71,721	60,046	15,856	147,623
Nov 2019	65,490	51,795	13,553	130,838
Dec 2019	48,501	41,238	11,021	100,760
Jan 2020	53,586	47,102	12,674	113,362
Feb 2020	66,511	51,176	14,098	131,785
Mar 2020	63,148	47,160	13,122	123,430
Apr 2020	16,418	32,127	6,005	54,550
May 2020	9,922	27,261	5,619	42,802
Jun 2020	47,957	38,064	9,179	95,200
Jul 2020	78,374	39,162	11,656	129,192
Aug 2020	82,115	31,182	11,269	124,566
Sep 2020	96,007	34,236	13,403	143,646
Oct 2020	104,806	37,220	13,587	155,613
Nov 2020	104,053	38,343	12,699	155,095
Dec 2020	78,093	30,071	11,691	119,855
Jan 2021	69,312	27,694	11,303	108,309

Though there is a gradual decrease in house purchases from November 2020 to January 2021, it should not be a cause for alarm. As shown in the above graph from the Bank of England, the surge in mortgage approvals in the middle of the COVID-19 crisis does not demonstrate normal historical market activity and is near the levels seen in the housing bubble peak before the 2008 global financial crisis. The surge was a catch up for demand which could not be satisfied early in lockdowns along with buyers responding to falling interest rates and new needs in a work-from-home economy. A new mortgage guarantee scheme lasting through the end of 2022 provides a guarantee to mortgage lenders across the UK for borrowers who put a 5% deposit on homes up to £600,000.

The decrease should be seen as the beginning of market normalising after the COVID-19 housing boom. Despite the crisis, affected lenders are encouraged by more market activity as they regain confidence in extending credit and central banks have promised loose monetary policies for years to come. When normal housing demand resumes, the mortgage industry should eventually process applications again more inline with regular historical levels seen from the 2014 to 2019 time-frame.

While the above graph breaks down house purchases versus remortgaging activity, the following graph from the Financial Conduct Authority shows a more detailed look at the market composition of home buyers. Falling rates gave buyers with tracking rates less incentive to refinance as their loan already tracks rates lower. Increasing home prices from easy loan conditions and relaxed stamp duties for people buying their primary residence gave buy-to-let investors reason to pause and first-time home-buyers reason to enter the market. Homeowners working from home who needed a larger space and those looking to move away from urban area lockdowns had incentive to move to larger properties in the countryside, causing home movers to spike as well.

Structural Mortgage Market Shifts: Increasing Loan Duration & Explicit Government Backing

While the stamp duty holiday was widely discussed, the UK also pushed through other structural shifts to the mortgage market in the wake of the COVID-19 crisis.

"In the UK, usually the longest term fixed mortgage you could normally get was five years. Boris Johnson has now created a 25 year fixed mortgage for first-time buyers, offered by banks, guaranteed by the government. Nobody can pretend that this has anything to do with Covid, and in fact when Johnson announced it, his stated aim was to give young people access onto the housing ladder. This is a good example of how the magic money tree was discovered for Purpose A, i.e. Covid, and is being used for Purpose B, furthering social justice." - Russell Napier

When governments guarantee loans they lower the risk of making the loans, which in turn increases the flow of capital into the associated market. That typically leads to faster appreciation.

Programs created to "help" people get into the market are initially effective, but after prices adjust to reflect said capital shifts and risk-free profits the market becomes structurally dependent on such programs & the incremental help they offer declines as prices rise.

The property market has been frenzied throughout the first half of 2021 with Rightmove stating the first half of the year has been the busiest since 2000. Average home prices across England, Wales and Scotland rose to £338,447, an increase of  £21,389 or 6.7% since the end of 2020.

The High Cost of Quick Decisions

Between 2015 and 2016, nearly one in three UK consumers chose mortgage products which cost them more than £550 per year. They got more expensive options over cheaper alternatives that were readily available and which they also qualified for. This fee difference amounts to 12.7% of what consumers spend annually on their mortgage.

The remortgage market is more competitive amongst lenders than the first-time buyer (FTB) market. So only around 12% in that category opted for strongly dominated product choices. About 18% of first-time buyers fall into the strongly dominated product choice category, and well over 20% of mover mortgages fall in this category. Movers who are in a rush often make emotionally driven or time-sensitive decisions. This compromises their ability to obtain the best deal the way a person who is remortgaging can.

About 14% of borrowers in the top credit score quartile secured strongly dominated products, while more than 20% of consumers in the bottom quartile did not. In general, people who are young, including borrowers with low incomes, low credit scores, and limited funds for deposit are more likely to get an unfavourable mortgage deal. If there are factors that make your transaction more complex, you might find it more challenging to obtain a good loan.

Due to the large price difference between loan products, around 70% of borrowers seek independent intermediaries to help them compare loans. Instead of going directly to a lender, they usually get a broker for help in finding and comparing loans. When comparing loans, it’s best to look at the total loan coast in Annual Percentage Rate (APR) rather than the interest rate in isolation. The former gives you a multidimensional view which incorporates the full cost of financing inclusive of arrangement, valuation and survey fees, along with any other expenses.

How Much Can You Afford to Borrow?

Lenders generally prefer borrowers that offer a significant deposit. They typically request at least 5% deposit based on the value of the property. If a house is valued at £180,000, a lender would expect a £9,000 deposit. In this example, the lender would be willing to offer a loan amount of £171,000. Meanwhile, some lenders may offer first-time buyers a 100% mortgage with a £0 deposit. However, obtaining this sort of deal usually forces a borrower to pay a much higher interest rate on their loan. This is usually one percent higher than a mortgage that requires a deposit. Consider this expensive trade-off before choosing a zero-deposit deal.

If you know the interest rate you’ll be charged on a loan, you can easily use the above calculator to estimate how much home you can afford. For example, at 2.29% APR on a £180,000 home loan, it will require £788.61 of full repayment per month, or £343.50 per month with an interest-only payment. If your maximum monthly budget for a home payment is £1,000 per month, you would then divide this amount by the above payments to get the equivalent loan capital. The example is shown in the table below.

Default Calculation

New Calculation

The above calculations consider the capital and interest portion of the mortgage payment, but do not cover other aspects of home ownership. If your property taxes cost £1,200 per year, that would be £100 per month. You would need to subtract that and any other expenses. This includes costs such as insurance or common dwelling fees before calculating the remaining capital and interest portion of your monthly payment.

If you had £200 in other monthly home ownership related fees, then this might take a renter equivalent of £1,000 down to £800.

Also, if you had a different interest rate on the offer, then you would need to use that interest rate in your calculations versus what our calculator shows as a default.

Want to Pay Your Loan Off Quicker?

With strong property prices, it’s not uncommon for people to take out loans extending beyond 25 years. However, with the rise of technology and automation, who knows what the world would look like in a quarter century? Paying extra on your home means your balance is lower today AND your balance is lower tomorrow. The earlier you make mortgage overpayments, the more interest expense you will save.

Making early overpayments reduces your balance for the duration of the loan. Just take note of early repayment charges (ERC). Some lenders allow you to overpay up to a certain amount before prompting early repayment penalty fees. These fees can range between 1% to 5% of your loan amount. Be sure to make qualified overpayments to avoid this extra cost.

Suppose you want to pay off your loan in 15 years. Your original mortgage has with a 25-year term. To estimate the overpayment amount you need to make, adjust the above calculator to 15 years. For example, a £180,000 loan structured over 25 years will see you pay £56,581.78 in interest over the life of the mortgage. However, if you pay off the loan within 15 years, your monthly payment would jump from £788.61 to £1,182.51. See the example in the table below.

Loan Amount: £180,000
Interest Rate: 2.29% APR

This example presumes you are able to maintain the same APR when you remortgage. Though your monthly payment increased, your total interest expenses would decrease to £32,851.43. This saves you a total of £23,730.35 over the life of the loan. Consider making overpayments to boost your interest savings.

How Do You Compare Loan Offers?

In any loan scenario, you have to make underlying assumptions such as:

• If you are likely to remortgage the loan again.
• When you are likely to remortgage.
• Where you think interest rates are headed.
• If you think you will sell the home soon.
• If rates head higher and your rate resets well above the initial offer, will your wages be enough to cover payments?

Look Beyond the Monthly Payment

It’s important to consider the overall mortgage costs, not just the monthly payment amount. Borrowers will find interest-only payments affordable. However, compared to a full repayment mortgage, you immediately build equity in your home. This bring you closer to home ownership, stability, and grants you further life flexibility. In contrast, interest-only payments do not build equity. It does not provide financial cushion which helps protect you against shifting market conditions.

If one loan amortises and the other does not, then you have to look at how much equity you build in a home. This is a key factor in determining value. Most people also do not want to pay mortgages for the entire lifetime, or until they hit a tough patch and risk foreclosure.

Example Loan Comparison from a Reader

The key to being able to accurately compare mortgage offers is to only adjust a single variable at a time. This way you can easily see the differences between offers, instead of trying to compare apples to oranges.

So if you know you want a 2-year introductory term on a 12-year amortisation schedule, you can compare all loans on offer that fit those criteria. This allows you to focus on comparing the difference in interest rate and total interest paid against the upfront fee for buying access to a lower rate.

The example below is based on a question from one of our users named Dan.

Useful information on your website. Your calcs suggest that more capital is paid than interest in the first year and going forward. However I have seen sites which suggest the opposite is true and I have to say my recollection was this this was the way it tended to work. What I am trying to work out is when I reduce my term from 20 years to 12 years whether I am better to go with 1.12% or 1.54% 2 year fixed. As the former has a fee involved I am trying to see how much capital I will have reduced over the 2 years to see if while the 1.54 is offer I will have reduced less of the loan when I look for another 2deal in 2 years (i.e. some of the monthly payment will have been paying interest rather than repaying capital borrowed.

Answer: The ratio of interest vs. capital repayment depends on both the interest rate AND the length of the loan.

• A longer loan term means a relatively larger share of early payments go toward interest instead of paying on capital (hence the term lasts longer).
• A higher rate has the same sort of function of increasing the share of the early payment that is applied toward interest.
• When interest rates are relatively high (e.g. 5% or 6%) then initial payments on a 25-year loan term go mostly toward interest. If rates are low like they currently are, then the opposite is true.
• Set the interest rate really high (say like 10%) while changing nothing else and you’ll see how dramatically it can change the capital allocation and payments.

Example loan scenarios below:

12-Year Fixed £200,000 @ 1.54%, Remortgaging 2 Years In

12-Year Fixed £200,000 @ 1.12%, Remortgaging 2 Years In

Presuming the loan terms are similar and you will remortgage in a couple of years, the ending balances should be quite similar. In the above examples the loan with a higher interest rate had a £673.84 higher balance. This is one of the two numbers you will need to look at.

What you really have to compare is the interest amount paid if you know you will remortgage in 2 years.

The difference in interest paid is £1,574.29 (£5,707.55 – £4,133.26). Add that amount to the balance difference and you get £2,248.13.

If this amount is more than the upfront fee, then you save money by paying the upfront fee for buying the lower rate.

To run the numbers again, let’s say that upfront fee is £1,200 and you roll it into the loan.

12-Year Fixed £201,200 @ 1.12%, Remortgaging 2 Years In

Financing the fee costs more than paying it upfront. But it can still be a viable option if there is a significant interest rate difference relative to the upfront cost. Even if you financed the loan fee, in the above scenario, you still come out ahead when compared against the higher rate.

By rolling the fees into the loan, you pay an extra £34.85 in interest over the first 2 years. Your balance at the end of the first 2 years is £11.02 higher than if you kept your current loan.

Your remaining loan balance being £11.02 higher is certainly worth the £1,539.44 saved on monthly interest payments over the course of those 2 years.

Only Compare a Single Variable at a Time

The trick with comparing loan offers is to decide what you want to keep the same (e.g. loan term). Then only compare loans with one difference at a time so it is easy to make an A vs. B comparison.

If you compare loans with different terms, rates, fees, caps and so on side by side, it can almost be impossible to make the best choice. Too many variables makes it difficult to decide.

A lot of people pick whatever the lower initial monthly payment is without considering how payments may change, what the fees are, etc.

In the above A vs. B example comparison, the fee for buying the lower rate was not rolled into the loan. If you are going to roll that fee into the loan, then you would do that same sort of comparison again. But you run the second calculation using the fee as part of the loan amount.

Projecting the Past Into the Future

We tend to presume the future will be a continuation of the recent past, though the year 2020 has shown this to not be true.

One last note of caution. Since the early 1980s, the world has seen falling interest rates as globalisation and technology have been massive deflationary forces driving down the cost of labour, logistics, and goods. Long-term interest rate cycles in developed economies often last for around 70 to 100 years. We are likely approaching a turning point sometime in the next couple of years. So when you go to remortgage again, rates may be moving higher already.

Central banks have been having interest rates pegged at the lower bound, and some even employ negative interest rates. As fiscal intervention picks up, rates are likely to head higher eventually. In fact, early on in the COVID-19 crisis, the Federal Bank of New York’s Kenneth D. Garbade authored a report on yield curve control measure that were used during and after World War II.

Paying for a longer fixed period can seem like a waste of money so long as interest rates keep falling. But when they start moving in the other direction, rising rates can have a dramatic impact on your monthly budget. You’ll have to get ready for more expensive payments.

I hope this helps you, Dan!

Equity Release Mortgages

Rising longevity coupled with increasing living costs have forced many elderly citizens to use their home equity. They tap it to pay for living costs or pay expenses for their own parents or children. Stamp duty fees and the hassle of moving makes equity release relatively appealing compared to the cost of downsizing.

People aged 55 years old and above use one of two types of loans to leverage on the equity they've built:

• Lifetime Mortgages: The homeowner can receive a lump sum or draw down equity over time. When the dwelling is sold, the homeowner can then repay the accrued interest owed along with the original amount borrowed.
• Home Reversion Plans: All or part of the home’s equity is sold upfront at a discount with the person receiving either a monthly payment or a lump sum. When the house is sold, proceeds of the sale are split according to the share of ownership by each part.

Of the two options, the lifetime mortgage option is far more popular with consumers.

Thank you!

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Reference Resources

• Mortgage lending statistics: Financial Conduct Authority, 2021
• Mortgage Lenders and Administrators Statistics: 2020 Q4: Bank of England
• Iscenko, Zanna. Choices of dominated mortgage products by UK Consumers: Financial Conduct Authority, 2018
• Miles, David. The UK Mortgage Market: Taking a Longer-Term View: HM Treasury, 2004.
• Miles, David. Incentives Information and Efficiency in the UK Mortgage Market: The Economic Journal, Vol. 115, No. 502, Conference Papers (Mar., 2005), pp. C82-C98
• Mohammad Jamei. Mortgage Market Forecast: 2018 and 2019: UK Finance, 2017.
• Mortgage industry of the United Kingdom: Wikipedia

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