Once you have worked out your budget and how much you can afford to borrow, getting the right mortgage is about more than just seeking out the lowest mortgage rate. Some of the lowest rates can carry a big arrangement fee, whereas other deals can carry smaller or no fee or offer help with other costs like valuation fees or provide a cashback.
It is important to focus on overall value over the deal period. Lenders have toughened their criteria regarding their judgement of affordability in recent years, so it is as much about knowing which lender will do what as it is about the rate and fee package. An agreement in principle (AIP) is an essential first step, but it doesn’t guarantee that the lender will lend, although it can be useful to reassure an estate agent that you are a buyer able to proceed.
Getting Expert Advice
To sort out the wood from the trees, you can get advice from various sources: online guides and analysis, mortgage advisers with banks/ building societies, an independent financial adviser (IFA) or a mortgage broker. The latter may not actually arrange your mortgage but should be able to advise on your options and help you to find the best deal. Check that a broker is registered with the Financial Services Authority (FSA) and that they offer advice on products from across the whole market. Mortgage advisers from banks or building societies will only advise about their own products.
Brokers can help you look beyond the interest rate and compare the overall cost of the mortgage. They may have exclusive access to deals including lender-direct deals and will only recommend a mortgage that is suitable and affordable for you, preventing you wasting time on applications that will not succeed.
Furthermore, if the mortgage turns out to be unsuitable for you, you will have certain rights regarding the broker’s advice. Plus there are specialist brokers for those with poor credit ratings or requiring services such as buy-to-let mortgages.
Although some brokers charge a fee, do not rule out using their services but ask instead what value they add in return for the fee, such as access to lender-direct deals, before making a decision on whether to commission them. All part of finding the right mortgage deal for you.
Choosing a mortgage deal
Decision-making is essentially a two-step process: choosing between interest only or repayment mortgages, and deciding on fixed or variable rates for mortgage payment. There are no universal right and wrong options here: the important thing is to judge which kind of deal is suitable for your own personal situation. This will be affected by your credit, asset, income and housing situation. The self-employed and contractors will face specific challenges in gaining mortgage approval, as will first-time buyers and those with poor credit ratings. In all cases, however, expert advice can be decisive in finding a suitable deal. Brokers and Independent Financial Advisers may specialise in issues such as buy-to-let mortgages and advising the self-employed.
Because an interest-only mortgage is exactly that – you only pay interest rather than capital repayments – the practice is considered risky by lenders because at the end of the mortgage term you still owe them all the money borrowed. Many lenders now restrict the size of the loan you can have on an interest only mortgage to a certain percentage of the property value (e.g. a maximum loan of 75% of the property value).
If you choose this option, it is up to you to make sure you have the money at the end of the term to pay off the mortgage. This generally means regular investment into an ISA, pension or endowment policy to ensure that you can repay in full. If you don’t have the money to pay off the mortgage at the end of the term, you will have to sell your home to clear the debt.
Fixed or variable rates?
As the economy changes, so can interest rates. So it is crucial to consider what type of mortgage deal offers you the best way to manage interest rates on your mortgage debt. The first step involves choosing between a variable rate, which may be cheaper initially but is subject to change, and a fixed rate, which will not change for a certain period of time.
Tracker and variable rates
Variable rate mortgages are of two types: trackers and discount / standard variable rates.
Tracker mortgages mirror the movements of the base rate, the benchmark interest rate set by the Bank Of England, and rise or fall in line with changes in the base rate, usually at a level above it.
Standard variable rates (SVRs) are set by lenders and each lender has it’s own one. These are usually influenced by the base rate but can change independently of it and may vary substantially. Borrowers will typically move to an SVR once an initial deal period on a mortgage ends. Once the initial deal period finishes, there are usually no major penalties for paying up early.
A discount rate mortgage usually offers a discount off a tracker or standard variable rate, following moves in a lender’s SVR. Unlike a tracker it can therefore move independently of the base rate. However, it is important to check how big the discount actually is and from what rate. Although often cheaper than the underlying rate, it can be affected by lenders hiking their rates.
Capped rates are part variable and part fixed and provide some benefit from interest rate falls and some protection from interest rate rises. Although initially more expensive than many fixed and variable deals, this option is attractive when there is a fear that interest rates may be about to rise substantially.
With a fixed rate, your interest rate and thus payments will be set for a period of time. This could be for two, three years, or five, or even up to 10 years. The rate you pay will not change during this time, but will revert back to the lenders standard variable rate after it finishes. This is often a good time to look for a better deal.
To fix or not to fix?
Although variable rates may be cheaper initially, they can increase when interest rates alter. Lenders will usually lock you in for the initial deal period of a tracker or fixed rate mortgage with early repayment charges.
No redemption mortgages allow you to repay the loan at any time without forking out for a redemption fee. There will probably still be sealing and legal fees – usually around £100 to £300.
It is best to avoid mortgages that have repayment charges beyond their initial deal period. Although most mortgages nowadays do not lock people in beyond an initial fixed or tracker period, it is an important pitfall.
How long to fix for?
Deciding the length of the fixed rate period is also important. Longer fixed rate periods mean greater security and budgeting clarity, yet early repayment charges will apply for longer too. The key thing in reaching that decision is balancing security against the fact that fixed rates will typically carry early repayment charges during the fixed rate period. So it is important to think about how long you are happy to lock in for – many are happy to choose short to medium term periods but may feel 10 years is too long.
All in all, the great variety of potential mortgage arrangements available, and the importance of finding a solution tailored to your specific needs, make the decision to take advice from a reputable mortgage broker a sensible one. However, even if this service is fee-free, there are a number of other costs connected with obtaining a mortgage that have to be factored in to your calculations. These include the lender’s arrangement fee, which may be between £500-£1,500, and can be non-refundable even if the house deal falls through. Some lenders also charge non-refundable reservation fees to secure a fixed-rate mortgage deal, which can amount to £100-£200. A valuation fee will also have to be paid for a survey, costing around £250. Legal fees for conveyancing can also cost around £500-£750. And finally, stamp duty must now be paid on purchases of property worth more than £125,000.