Find a home loan that works for you

Estate agents say we know within seconds of entering a property whether or not we've found the home for us.

Unfortunately, the same isn't true when it comes to picking a mortgage and, with more than 2,000 available, it pays to do some homework.

"The first question you want to ask yourself is whether you want a repayment or an interest-only mortgage," says David Hollingworth, mortage specialist for London & Country.

"Interest-only means a cheaper monthly payment, but you don't have the security of knowing your debt will be paid off at the end of the term.

"Repayment costs more each month, but gives you the peace of mind that when you get to the end of the term you will own your home outright."

For example, if you take a 25-year £100,000 mortgage at 5%, a repayment mortgage would cost £584.59 a month, while an interest-only mortgage would only cost £416.67 a month.

But, although it's cheaper, you'll still owe £100,000 at the end of the term, which could make it a false economy. Over the course of the 25-year term, you'll pay a total of £175,377 on the repayment mortgage.

Your interest payments will total £125,001 on the interest-only mortgage but you'll need to find a further £100,000 to clear the original debt.

Which of these types of mortgage is right for you may come down to affordability.

For example, if you're stretching your budget to buy your first home you might need to take an interest-only mortgage, switching to a repayment mortgage when you can afford to make higher payments. 

Types of mortgage

As well as thinking about whether you want a repayment or an interest-only mortgage, you'll also need to decide which type of mortgage suits you best.

Although there are a variety of types available, such as tracker mortgages, five-year fixes and discounted deals, your decision boils down to whether you want a variable or a fixed rate.

"If you want the security of knowing how much your mortgage payment will be each month – for example, if your budget is tight or you think interest rates will rise – a fixed-rate might be better.

"If you're happy to see your repayments fluctuate, go for a variable product," says Hollingworth.

Fixed rates tend to be higher than variable rates, with the differential dependent on long-term predictions for interest rates.

For instance, according to on 14 April 2010, the cheapest variable rate for a 75% loan-to-value mortgage was 2.84% from ING Direct, but, for a five-year fix, you'll pay a rate of 4.59% from the Chelsea Building Society.

On a 25-year £100,000 repayment mortgage, putting arrangement fees and other charges aside and assuming the variable rate doesn't change, this equals a difference of £95 a month on your repayments. 

This could change, however. "The difference between the rates on fixed and variable mortgages does vary and there is room for it to reduce," says Ray Boulger, senior technical manager at John Charcol.

Fees and charges

Fees are another consideration when choosing a mortgage. Arrangement fees vary between products, with most falling within the £500 to £1,000 bracket. Some lenders will also allow you to adjust the fees in exchange for a higher, or lower, mortgage interest rate.

Fees might also affect your choice of product, as Hollingworth explains: "If you go for fixed rates you'll pay fees each time you remortgage, so factor these into the overall cost.

If you don't like the thought of paying fees each time, go for a lifetime variable product such as a tracker."  

Another fee to look out for is the early repayment charge. These are in force on many of the short-term deals and come into play if you duck out of the product early.

"Most are around 2% to 3% of the loan, but check the small print as this could restrict you," warns Hollingworth.

As well as looking at the cost of setting up the mortgage, you also need to take into account the deposit. The bigger the deposit you have, the better the deals you'll be able to access.

"You'll need a deposit of at least 25% of the property value to secure the best deals," says Boulger.

"If you have a smaller deposit it can be worth trying to find additional funds. You might be able to borrow from your family, or even take an unsecured loan to increase your deposit."

For example, according to Moneyfacts, the best variable rate for an 80% loan is 3.59% from the Post Office. But if you can scrape together a further 5% for the deposit, the best rate falls to 2.84% from ING Direct.

Another factor that will affect the cost of your mortgage is the length of the mortgage term. Although the standard term is 25 years, your monthly repayments fall, the longer the term on a repayment mortgage. However, the overall cost will rise.

"Your decision will come down to affordability, but go shorter if you can," advises Hollingworth.

"If you don't want to commit to a shorter term, look for a deal that allows you to overpay. Most allow overpayments of 10% of the loan each year without further charge, which can bring down the overall cost of your mortgage."  

If you're confused by the number of mortgage options available, speak to an independent mortgage adviser who will help you find the best deal for you.