Five-minute guide to choosing a mortgage
The first thing to think about in choosing a mortgage is whether to go for a repayment or an interest-only option. An interest-only mortgage means you will have a cheaper monthly repayment, as you will only pay off the interest rather than the capital, but at the end of the term, you’ll be left with the original debt.
If you opt for a repayment mortgage, on the other hand, you will clear the entire debt by the end of the term, but you will likely have higher monthly payments.
David Hollingworth mortgage expert at London & Country, says: “Repayment mortgages are the way forward. While interest-only is an alternative option if you have equity-based investments [that you plan to cash in on maturity of the mortgage deal] there’s always a chance you could end up with a shortfall at the end of the term.”
Another factor to consider is how your income might change over time, and when. Mortgage interest rates are either fixed or variable, so you should consider if you are happy to pay what is usually a higher fixed rate, or if you don’t mind taking a gamble on a variable rate that could hike unexpectedly.
“First-time buyers may want the security of a fixed-rate mortgage so they know where they stand,” says Hollingworth. After shelling out a deposit and all the other costs related with moving, first-time buyers are unlikely to have a safety net in place for if their repayments do rise, so a fixed mortgage will usually suit them better.
Researching different mortgage options takes valuable time and energy but you are more likely to get a better deal if you cover all bases. For example, you might need flexibility in the case of a missed payment, so looking for a mortgage with the option of a payment holiday would be best for you.
It is best to disclose all your details at this stage, such as any fluctuations you experience in income, or other unique circumstances, this will help you get the right product.
Mortgages generally fall into three categories: standard variable rate (SVR), which falls in line with the Bank of England base rate; fixed rates, where the interest rate is fixed for a set-term; and capped rates, where the interest is capped at a set level.
In the UK, it’s a 50/50 split between those who choose fixed and those who choose variable, according to Hollingworth.
Within variable rates there are tracker mortgages, which have an interest rate ‘tracked’ to the Bank of England base rate, and discounted rates, where the rate is fixed below the lender’s own standard variable rate.
Do your research
But where to start with this abundance of information? Hollingworth suggests the internet: “You can get an idea of rates online. However, you can’t get a feel for the different circumstances. For tailored advice, visit a mortgage broker. It’s more about criteria – fitting the circumstances to the borrower.”
Websites such as moneysupermarket.com, uSwitch and confused.com can compare different mortgages and interest rates, but they don’t show your eligibility for the product. The best way to find a mortgage deal is through an independent mortgage adviser, who will look at lots of different lenders and find a product to suit you.
The big banks still offer the best products, but some smaller building societies also offer good deals, says Hollingworth. “Consider smaller building societies, they can be really quite competitive, but the criteria may not be as flexible. Don’t block off any options.”
Mortgages come with all manner of charges and conditions, so ensure you look at the total fees you will have to pay rather than just the interest rates. Lenders may include a free valuation of the property to entice you, or a small cashback fee when the transaction has completed, but don’t choose a deal based purely on these incentives.
Hollingworth expands: “Read the literature - especially the ‘key facts illustration’ - which will tell you the rate you’ll pay and what the charges are if you pay it off early. Go through that and you’ll understand if the product is right for you.”
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.