How to choose the right mortgage for you
Whether you are buying a new property or just remortgaging there are several factors you need to consider when choosing your mortgage and working out how much you can afford to borrow.
So before you do any research it really pays to think about your circumstances as this should have a significant bearing on the type of loan you go for, the lender you approach and, if you are buying a new property, how much you can afford to borrow.
In order to do this you need to think about your lifestyle and really put your spending under the microscope - there is no point stretching yourself to the limit if your financial circumstances are likely to change in the near future; for example, you are unsure of your job security or plan to start a family.
And it makes sense to do this before you apply for any loans. Under new rules introduced as part of Mortgage Market Review, lenders are going to greater lengths to prove you can afford the loan, not just now but in the future too when interest rates could be higher.
In addition to working out how much you can afford to borrow, it also pays to consider how much you can afford to put down as a deposit. While there are loans available at 95% of the property's value (the loan to value or LTV) for borrowers who can only afford to pay a 5% deposit, the more you can afford to put down, the better the rate you will get.
The lowest rates tend to be reserved for those borrowers with a deposit worth 40% or more, because they are perceived to be less risky to lenders. This means they are either the preserve of wealthy buyers, or homemovers or remortgagers who have capital built up in their homes.
However, if you are a first time buyer struggling to take that first step on the ladder there are alternative options – such as Help to Buy or shared ownership schemes.
With a clear idea of both how much you can afford to borrow and how much you can afford to put down as a deposit you are in a much better position to go mortgage shopping. However, before you start it makes sense to stop and think about interest rates and where they are headed.
WHAT ABOUT INTEREST RATES?
Nobody expects you to be an economist or the proud owner of a rate-predicting crystal ball – after all, the financial crisis that saw interest rates plummet to 0.5% caught even the experts by surprise. Nonetheless it pays to take an interest as the outlook may very well influence your eventual choice and, depending what the future holds in store, determine whether the loan is affordable both now and in the coming years.
Having a view on interest rates can also help you narrow down your mortgage choices. If you are concerned that they will rise you may want the peace of mind offered by a fixed-rate mortgage, which ensures that your mortgage repayments will not go up (or down) whatever happens to interest rates. This can be an advantage if there's no wiggle room in your budget.
Alternatively if you are less concerned about your repayments going up or down you can go for a discount on the lender's standard variable rate or a tracker, which go up and down in line with the Bank of England base rate.
Only now are you ready to start shopping around. Mortgage comparison services can help you do this online: by entering your requirements in terms of loan and deposit size as well your product preference, the website will quickly come up with a list of ‘best-buys'.
However, best buy doesn't always mean best for you. It's also important to check how flexible the loan is – how much can you overpay, for example. This could be really important if you receive bonuses at work or are likely to receive any other lump sums that you want to use to get your mortgage balance down. If you want utmost flexibility and have sizeable savings, it may also make sense to go for an offset mortgage.
You should also pay close attention to fees – these have been creeping up in recent years and can be as much as £2,000 (if not more) on the cheapest rate mortgages. For a great rate on a large loan it may be worth stumping up the money, but if you have a smaller loan it may make sense to go for a mortgage with a higher rate and a lower fee.
For many borrowers, particularly those who are remortgaging or have no complex requirements, it should be relatively straightforward to research and apply for a mortgage yourself.
However, if you don't fancy doing the legwork or have more complex requirements - you are self-employed for example - a consultation with an independent mortgage adviser could be very useful. The same applies if you'd prefer an interest-only loan or if the term is likely to stretch into your retirement.
Not only will brokers have access to a wider range of loans, but they'll also have a much better idea as to which lenders are most likely to accept your application, saving you stress during what could be a very stressful time. Likewise, if you are concerned about the new affordability assessments, a broker will be best-placed to help you through the process and help you select the lender that's most likely to accept your application.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
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 way of combining a mortgage and savings so the savings “offset” and reduce the mortgage. Rather than earning interest on savings, the savings reduce the mortgage and the interest paid on the borrowing, so savings are effectively earning interest at a higher rate than most mainstream savings accounts will pay. They are also tax-efficient, as savers avoid paying tax on interest that their deposits would otherwise have earned. Offset mortgages offer the disciplined borrower a great deal of flexibility, as overpayments can be made to reduce the term or monthly mortgage repayments, which can save thousands of pounds in interest payments over the mortgage term.