A MORTGAGE can help you afford your own home but how do you choose between different rates and loan types?
Here is how to find the best deals to give you a leg-up onto the property ladder.
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How do mortgages work?
The average property price in the UK is £250,341.
That’s a lot of money but you don’t necessarily need the whole amount to buy a property.
Most people use a mortgage to help get on the property ladder.
A mortgage is a loan you get from a bank or building society that helps you purchase a property.
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A bank or building society will lend you a certain amount depending on how much it feels the property is worth.
This is known as the loan-to-value (LTV) and you will need to put down a deposit to cover the rest.
For example, a lender may advertise a mortgage at 75% LTV and in this case you would need to come up with a 25% deposit.
So if you are purchasing a £300,000 home with a 75% LTV mortgage, a lender would lend you £225,000 and your deposit would be £75,000.
You will need to repay the loan each month over an agreed period and the lender will also charge interest.
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The mortgage is secured on your home until the debt is paid off, and your property may be repossessed if yoeu fall behind on your repayments.
There are two ways you can repay your mortgage.
A repayment mortgage includes the capital and interest in your monthly repayments.
This reduces the amount you have borrowed each month. meaning that it is fully paid off at the end of the mortgage.
In contrast, an interest-only mortgage lets you only pay the interest.
This makes your monthly payments cheaper but the amount you borrowed still remains unpaid once you come to the end of the term so you would need to be able to repay this as well.
Many borrowers were caught out by this during the housing market crash in 2008, as they had been allowed to self-certify their own income and get interest-only loans but then struggled to repay if they lost their jobs or their property fell in value.
Now borrowers are required to have a repayment strategy in place to get an interest-only loan, such as selling the property or repaying with the proceeds from a Stocks and Shares Isa.
Lenders also have stricter and high income requirements for interest-only loans.
What mortgage do I need?
The type of mortgage you need will depend on your circumstances.
Most banks and building societies will have a standard range of products that will loan different amounts depending on your deposit and loan to value ratio.
These are typically aimed at homebuyers as well as those switching to a new deal, known as remortgaging.
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Lenders also offer mortgage deals for first-time buyers that will typically have lower deposits; and there may also be specialist products aimed at the self-employed and older borrowers with harder to prove income.
There are also buy-to-let mortgages, which are loans for landlords to purchase a property they are planning to rent to tenants.
The rental payments can go towards repaying the mortgage.
The government also supports mortgage schemes to help first-time buyers onto the property ladder:
Help to Buy equity loan: The government will lend you up to 20% of the value of a new-build home – or 40% in London – after you’ve put down a 5% deposit.
The loan is on top of a normal mortgage, but it can only be used to buy a new build property in England and is subject to regional house price caps.
Lifetime Isa: This is another government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership: Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount.
You can buy anything from 25% to 75% of the property, but you’re restricted to specific ones.
How do you get a mortgage?
Mortgages are offered by banks and building societies.
You can apply direct or use a broker who can help find the best mortgage deals and prepare your application.
Most lenders will provide an agreement in principle (AIP) online, or in-branch, based on an informal chat to find out your income and expenses, so you can see how much you could borrow.
This is still subject to credit checks and passing the application process.
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You will also need to put down a deposit.
The more you can put down, known as your equity, the lower your loan and the cheaper your repayments should be.
The money could come from your own savings if you are a first-time buyer, or you could use equity in your current property if you are remortgaging.
A lender will want to see evidence of your household income and spending once you are ready to do a full application.
This usually includes three months of payslips and bank statements as well as any loans or credit cards you have.
They may also ask questions about your age, your job and future spending plans to see how your ability to repay could change.
This information will be used, alongside a credit check, to assess if you can afford the loan.
Lenders have to conduct interest rate stress tests as well to see if you can still afford the mortgage if repayments increase.
The lender will also want to value your property to check if they agree with the price and it fits with their loan criteria.
A lender may take a few weeks to consider your application.
If approved, the offer is usually valid for six months.
What are mortgage interest rates?
As with any loan, a mortgage lender will charge interest on top of your repayments.
The interest rate can vary depending on the size and the type of the loan as well as how long you are taking the mortgage deal out for.
Generally, the more deposit you put down, the lower the interest rate you will get.
What else do I need to consider when looking for a mortgage?
There are other costs associated with a mortgage beyond the monthly repayments.
There may be an application fee which can range from £100 to £2,000.
A lender may charge valuation fees to value your property, and for doing any legal work such as conveyancing.
Both of these could cost from around £500 to £1,500.
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There may even be a fee if you use a broker.
Also, watch out for any exit fees or early repayment charges (ERCs) if you want to switch your mortgage before the end of the deal term.
These can be as much as 5% of the remaining loan in the first year and reduce the closer you get to the end of your deal.
As well as the mortgage, if you are moving home you may also have to pay stamp duty removal costs.
There is currently no stamp duty to pay for any type of buyer on the first £500,000 of a property purchase until the end of June.
This drops to £250,000 until the end of September for home movers but first-time buyers will still benefit from an exemption on the first £300,000 of a purchase up to a maximum property price of £500,000.
What is a mortgage in principle?
A mortgage or agreement in principle lets you see how much you could borrow without having to do a full mortgage application.
Most lenders will let you get a mortgage in principle on their website by entering your personal details such as your age, income and expenses.
Some lenders will perform a soft credit check which won’t impact on your credit score. Your lender or broker will be able to confirm this.
This isn’t a concrete offer and doesn’t include a hard credit check, but gives you a general idea of how much a bank is willing to lend based on their criteria and the information you provided.
It gives you an idea of the properties you can afford, and you can tell an estate agent that you have a mortgage in principle when making an offer to show how serious you are.
A mortgage in principle typically lasts for 60 to 90 days.
What happens to your mortgage when you move house?
There are a couple of different options for your mortgage when you move house.
Your mortgage will most likely be paid off once you sell your home.
But you may be on one of the best mortgage deals and not want to lose your rate.
Some lenders may let you move your mortgage with you, which is known as porting.
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You will still need to complete a mortgage application as you are applying for new, and sometimes more, money from the bank.
They will want to consider any changes in your income and if the value of your new property meets their lending criteria.
If you cannot port your mortgage, either because it is not allowed or a lender won’t approve a loan on the old terms, you may need apply for a new home loan.
Alternatively, you could take out a new mortgage if there is still some of your old home loan to repay.
This is where you take out a new mortgage to repay the old one.
It is worth calculating if you can still save money even after ERCs though, such as if you are moving to a lower mortgage rate that will reduce your monthly repayments.
Alternatively, moving to a bigger dream home may justify paying exit fees.
What is a good mortgage rate?
Mortgage rates vary among lenders.
Pricing is influenced by the Bank of England base rate and how much it costs lenders to borrow the money on the wholesale markets.
It also depends how much competition there is in the market and how keen a lender is to attract new customers and build market share.
You need a large deposit of around 40% to get the best fixed rate mortgage deals.
Additionally, the best mortgage deals for first-time buyers may not be the best rates on the market but will require lower deposits.
Will mortgage rates go down?
Mortgage rates change all the time as banks bring out new products, remove older ones and change pricing according to market and economic factors.
The rate you pay on a fixed deal won’t change during your deal term but will go up at the end and move to a more pricey standard variable rate (SVR).
The rate you pay may go down on a tracker mortgage if the benchmark it is following drops. But it can also work the other way and rates can go up if its benchmark rises.
What is a fixed rate mortgage?
A fixed rate mortgage provides an interest rate that remains the same for an agreed period such as two, five or even 10 years.
You monthly repayments would remain the same for the whole deal period.
Two year fixes tend to have the lowest rates, but you get more certainty with a longer term fix as your monthly repayments remain the same for longer.
What is a variable rate mortgage?
There are a few different types of variable mortgage and, as the name suggests, the rates can change.
A tracker mortgage sets your rate a certain percentage above or below an external benchmark. This is usually the Bank of England base rate or a bank may have its own figure.
If the base rate rises, so will your mortgage but if it drops then your monthly repayments will be reduced.
There are also discount rate mortgages that set repayments based on a lender’s default SVR, or capped home loans that are linked to the SVR but won’t go above a certain level.
In both these cases your repayments can change if the SVR is moved up or down.
Variable rate mortgages often don’t have exit fees while a fixed rate could do.
How to choose the best mortgage deal
There are lots of factors to consider when searching for the best mortgage deals.
The amount you can borrow and interest rate are important factors but you should also consider the type of mortgage.
Do you want the certainty of a fixed rate mortgage or the flexibility of a tracker that could get cheaper and doesn’t have exit fees?
Even the type of fix is a key question.
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For example, the best 5 year mortgage deals may give you a solid half decade of regular repayments, but are you likely to want to move during that term as you could then face paying ERCs or exit fees.
Don’t just choose the lowest rate, as these often come with high fees, which pushes up the total cost of your mortgage.
It may be worth paying a slightly higher interest rate and a lower fee as this makes the upfront cost of your mortgage cheaper.
There are mortgage calculators online that will let you compare the monthly cost of a mortgage based on the interest rate and any fees.
A lender or mortgage broker will be able to offer advice on the best type of mortgage deal to meet your needs.
How to find the best mortgage deal
Shop around for the best mortgage deals rather than opting for the first bank you see.
Remember a bank or building society will only offer its own options which limits your choice.
You can also use a comparison website to find deals across the market based on your level of deposit and whether you want a fixed or variable rate.
A comparison website will usually let you search for all types of home loans such as for first-time buyers or the best buy-to-let mortgage deals.
This will give you an indication of what is on offer but you will need to do the application yourself.
Some lenders may not be on comparison websites so it is worth searching directly online as well.
Alternatively, mortgage broker can help search the market more widely and find the most suitable deals for you.
Is it better to get a mortgage from a bank or a broker?
A bank may offer the best mortgage deal for you but shop around before you commit.
This is because a bank adviser will only offer their own products.
Going through a mortgage application can be stressful and time consuming so you want to ensure you have a good chance of success.
Limiting yourself to one bank’s products could mean you end up paying more than you needed to or you may not even meet their criteria.
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A rejection will show up on your credit report and reduce your rating, making it harder to get finance in the future.
It is worth getting a mortgage in principle first through different bank’s websites to give you an idea of whether it will lend to you and how much you could borrow to avoid disappointment.
Getting a mortgage in principle doesn’t impact your credit score but it helps you get better prepared.
Alternatively, a broker can use their market knowledge to help decide which type of mortgage and lender is best for you.
This could be of benefit if you are self-employed or have a poor credit rating as they may have more experience of dealing with these sorts of applications.
It saves time on doing multiple applications, as you just tell your broker your income and expenses and they will work out the best mortgage you can get.
They can usually help with your application and will fight your corner to get you approved.
A broker will be able to advise on a range of products from different lenders, but these may also be limited to a panel so you should check if they are tied or whole of market.
There may, however, be extra fees when using a broker.
A mortgage may have an application or product fee but a bank adviser won’t charge anything on top of that.
In contrast, a mortgage broker may have their own fees for their advice.
Will a mortgage advisor always present you with the best deal?
Using a mortgage broker can be beneficial as they can help assess your finances, prepare your application and find the most appropriate deal for you.
You usually only have to chat with them once about your income and spending and provide your payslips and bank statements.
They will use this information and their skills and experience to find a mortgage for you.
This may not necessarily be the best deal on the market, but it will be the deal a broker feels you are most likely to be accepted for based on the type of mortgage you want and the lending criteria of a bank or building society.
Do mortgage brokers get better deals?
Mortgage brokers get access to exclusive deals through the intermediary-only arms of banks and building societies.
These could be the best mortgage deals compared with the rest of the market depending on your needs and competition at the time.
However, there are some lenders that don’t work with brokers and advisers may be tied to a panel of lenders so you could also miss out on other offers.
There is nothing stopping you from using a comparison website or online search to compare the best deals across the market against what a broker is offering you.
Does it matter which bank you get a mortgage from?
You can get a mortgage from any bank or building society.
This is particularly important when you come to the end of a deal.
Most lenders will move you onto a more expensive standard variable rate once a fixed term product expires.
You can save money by switching to a new deal or remortgaging, but you don’t just have to use your existing lender..
Your lender will contact you as you come towards the end of your deal with new rates.
Make sure you shop around to compare these with the rest of the market as you could save money by switching elsewhere.
What credit rating do you need for a mortgage?
A lender will do a credit check when you make an application to see your track record of managing your debts.
As with any borrowing, the higher your credit score the more likely you are to be accepted.
This means poor marks on your credit report, such as missed payments, county court judgements or bankruptcies – all of which push your score down – can make it harder to get approved for a mortgage.
Beyond your credit rating, you will also need to pass a lender’s affordability assessments and stress tests so accurate information about your income and expenses are just as important to your application.
How can I lower the interest charged on my mortgage?
The more deposit you can put down the lower the interest rate will be.
But that is just one way to access a low rate.
There are a couple of other ways to reduce what you owe on your mortgage.
You can make overpayments each month or from a lump sum.
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A lender will usually let you make overpayments of up to 10% of a mortgage each year.
This will reduce the amount of interest charged as the loan value is reduced.
Another way to reduce your interest payments is with an offset mortgage.
This links your mortgage to your savings to reduce interest being charged on their loan.
The more savings you have, the less interest you will pay on your mortgage, which should lower your monthly repayments and help payoff the debt sooner.
It would mean having your savings with the same bank that provides your mortgage.
You may not get the best interest rate, but it may be worth it to reduce your mortgage repayments.
When should I start looking for a new mortgage deal?
Getting your mortgage prepared when buying your first home can make you more attractive to sellers as they can see you have finance in place and are serious about proceeding with a purchase.
It can take a a couple of hours or a few days in more complicated cases to get a mortgage in principle.
This gives you an idea of how much you can borrow, and you can usually get a decision within hours or a few days in more complicated cases.
You can do a full application once you have had an offer on a property accepted.
It can take four to six weeks for a mortgage to be approved depending how much information a lender needs.
A seller will usually wait, once they have accepted your offer, for you to get your mortgage sorted.
But having an idea of what you can borrow in advance will speed up your purchase and ensure you don’t miss out on your dream home.
More preparation is needed if you are remortgaging.
A lender will move you onto a more pricey SVR once your mortgage deal comes to an end.
That means you could have been on one of the best mortgage deals and suddenly your monthly repayments will increase.
You should start looking for a new mortgage at least three months before your deal ends.
It can take at least two months for a remortgage to complete so you need to allow time to find a new deal and make the application.
Mortgage offers typically last up to six months, so you could start early if you spot a good rate and time the start date so you avoid any exit fees and move smoothly onto the new rate once your deal expires.
