How to select the right mortgage
When it comes to buying a property, selecting a mortgage is the second biggest decision you’ll make, after choosing the house of your dreams. Get the best deal by arming yourself with as much information as possible. Our guide will help you do just that by cutting through the jargon and offering advice on where to start.
Firstly, it’s important to remember that the bigger your deposit, the better the mortgage deal you’ll be able to secure.
The heady days of 100% mortgages are well and truly over. After the credit crunch in 2007, lenders introduced strict lending guidelines and were reluctant to take on anyone they considered a risk. Nowadays, the best rates are reserved for those with large deposits (40+%), but a 10% deposit will still help you get on the property ladder and 20% plus opens even more doors. A 5% deposit is the minimum, and is possible via the government’s Help to Buy scheme. So start saving as soon as you can and stick to it.
The amount you need to borrow, after your deposit, is sometimes referred to as Loan to Value (LTV). For example, if you want to buy a house that’s worth £200,000 and have a 20% deposit (£40,000), you’ll need an 80% LTV mortgage.
Other mortgage terminology you’re likely to come across includes:
ERC – early redemption charge. A fee that has to be paid if you want to terminate the mortgage deal before the end of the agreed term. It is normally a percentage of the loan.
Repayment – this is a type of mortgage where your monthly payments cover the loan and interest charges, so that at the end of a 25-year period the full amount has been paid off.
Interest-only – only the interest on the loan is paid per month, which means you have to make separate arrangements to pay off the total value at the end of the mortgage lifetime.
Your total monthly payment
What is the best mortgage for me?
When it comes to choosing a mortgage your choice is essentially between a variable rate – one that can change – and a fixed rate, which will not change for a certain period of time.
Variable rate mortgages
As the name suggests, a variable rate can go up and down in line with the Bank of England base rate. There are two main types of variable rate mortgage: trackers and discounts (also known as Standard Variable Rates).
Tracker mortgages mirror the movement of the base rate, the benchmark interest rate set by the Bank of England. They will rise or fall in line with changes in the base rate, and usually at a percentage above it. Tracker rates last for a specific period of time or ‘term’. Some can be the lifetime of the mortgage however, in most cases, it’s normally two, three or five years at which point you’ll automatically move onto a higher rate. Many people then re-mortgage to get a better deal.
Discounts or Standard Variable Rates (SVRs) are set by lenders and each lender has its own one. These are usually influenced by the base rate but can change independently of it and vary quite substantially. When the Bank of England base rate plummeted to 0.5% very few lenders passed this saving on.
Banks and building societies frequently offered mortgages set at their SVR but these are much less common nowadays. However, borrowers will typically move to an SVR once an initial deal period ends. Again, beware of ERCs if you want to redeem the loan outside of the agreed term.
For those who are risk-averse or need to guarantee how much is going out each month, a fixed rate mortgage might be more to their taste. This type of mortgage is fixed at a percentage over a period of time, normally two, three or five years. Once the term ends the rate then moves to a variable one at which point you can shop around again.
Over this timeframe a lot can happen, for better or worse, therefore you have the reassurance of knowing your mortgage payments won’t change. It’s not always easy to predict what the market will do so, a fixed rate mortgage can act as a buffer to unpredictability. But remember, you’ll be unable to take advantage of any interest rate drops without pricey exit fees.
Starting to search
If you’re wondering where to begin, the best place is the internet. Compare the latest deals on comparison sites such as MoneySavingExpert. Talking to a mortgage broker will also help you to find exclusive deals. Ask for recommendations from friends and family for a reliable broker you can trust. Remember brokers charge a fee for their services, but if they find a suitable deal this initial cost will pay for itself in the long run.
Before you dive into the process, try to get your paperwork in order so that you can easily prove your monthly incomings and outgoings over a four-month period, as your lender will ask to see this evidence. And be clear from the outset about what you can, and can’t, afford to avoid disappointment.
We’re always here to talk to prospective buyers about the best options available. Our work doesn’t stop until you’re living in and loving your new Charworth Home, so pick up the phone and call us any time for advice and information.