When it comes to selecting the right mortgage for you, there’s more than one factor to consider. It’s likely to be one of the biggest loans you ever take out, whether it’s to buy your first home or to fund a step up the property ladder, so getting it right is important.
If you’re searching for a mortgage, it’s easy to become fixated on the interest rate. But that’s not the only thing that should be on your radar. There is a plethora of other crucial factors that should influence your decision too.
Type of mortgage
The first step to picking out a mortgage is to look at the different types available. Your first choice is between, a repayment mortgage or interest-only mortgage.
With an interest-only mortgage, your monthly payments will be lower. But you will still owe the same amount borrowed at the end of the mortgage term as you’re not paying back any of the capital. There are some cases where an interest-only mortgage is appropriate, however, most people opt for a repayment mortgage. This is where some of your monthly repayment pays off the loan, so at the end of the mortgage term, you own the property outright, assuming you’ve met all payment obligations.
Once you’ve decided this, you’ll then need to look at how the interest is paid on your mortgage. There are broadly three options, with tracker and variable options being similar. Which is right for you will depend on your priorities.
Fixed: With a fixed rate mortgage, you know what your monthly payments will be for a defined period of time, usually two, three, five or 10 years. It’s an option that provides more certainty, but you won’t benefit should rates fall.
Tracker or variable: With both of these mortgage types, the rate of interest you pay can increase and decrease. A tracker mortgage will follow the Bank of England base rate, while a variable mortgage will depend on the rate set by your provider.
How much do you have to put down on your home? The level of deposit you have will dictate which mortgage products are open to you and the rates you can access. Typically, the most competitive rates will be reserved for those with the highest deposits.
If you’re a first-time buyer, expect to need a deposit of at least 5-10% to access most mortgage products. However, there are mortgages on the market that will offer you 100% of the property’s value.
For those remortgaging, you’ll usually have far more choice, as your equity in the property is likely to have grown.
We know we said you shouldn’t only look at the interest rate, but it’s still up there as one of the key things to consider. It will dictate how much you pay each month and the interest over the term of your mortgage after all.
Interest rates have been at a low for almost a decade now following the financial crisis. As a result, there are many competitive options on the market. Clearly, you want an interest rate that’s as low as possible, even a seemingly small difference can have a big impact over the full length of your mortgage agreement. But don’t let it be the only thing you look at, you could end up with a mortgage that’s not best suited to you.
We all know that mortgages are a huge commitment and expensive. But the associated fees when taking out a new mortgage are often forgotten about.
They can vary significantly between lenders and there’s likely to be more than one charge. From booking and arrangement charges to valuation fees, don’t forget to look at how much you can expect to pay to secure your new mortgage.
Length of mortgage
Most lenders offer flexibility in terms of your mortgage length. It can help give you greater control over your finances and align repayments with what you can afford.
Standard mortgage terms are 25 years when you’re just stepping on to the property ladder. But many borrowers are choosing to extend this to make payments more affordable. Depending on your age and circumstance, it is possible to access a mortgage that lasts 40 years.
Choose a mortgage with a shorter term and your monthly payments will be higher but, overall, you’ll pay less interest. Balancing your short and long-term budgets and aspirations here is important.
If you’re remortgaging, you’ll have the option to lengthen or shorten your term too, reflecting how your situation may have changed.
Overpaying your mortgage can knock years off your mortgage length and save thousands in interest without having to make a commitment to higher outgoings. But it can come at a cost.
Most lenders will allow you to overpay without a charge up to a certain point; such as 10% of the outstanding balance. Above this amount, you may have to pay a penalty, which may mean you end up losing out. You’re also likely to face early repayment charges too. If you’re expecting to receive an inheritance that will pay off your mortgage, for example, you should look closely at how much this will cost you.
Even if you don’t plan to overpay or pay your mortgage early, it’s worth making sure you understand what the potential fees are. You never know how your financial position may change in the future.
Do you plan to move home during the term of your mortgage? Then checking to see if your chosen mortgage product is portable is crucial.
A portable mortgage means you may be able to transfer your mortgage product to a new property. It offers you more flexibility and many mortgages do have this feature. However, there are no guarantees that your lender will allow you to do so. For example, you may no longer qualify for the same mortgage if your provider’s lending criteria change.
If you can’t port your mortgage, you can take out a new product. However, this option is likely to come with charges, such as an early repayment charge or an exit fee, that can prove very expensive.
Again, even if you don’t plan on moving during your mortgage term, clarifying where you stand is important.
Some mortgage providers will offer incentives to entice you, such as a free valuation or a cash rebate on completion. Don’t be tempted by these decisions alone when picking out a mortgage but they are something to keep in mind.
Be careful to weigh up the actual value of any incentive against what you could be missing out on; a lower interest rate for example. However, an incentive can certainly sweeten the deal and save you some money in the short term.
If you’re searching for a mortgage but are feeling overwhelmed by the sheer number of things you need to factor in and products on the market, we can help. We provide support for homebuyers across all parts of the market, from first-time buyers to those taking their last step on the property ladder. Contact us today.