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Top tips for choosing the right mortgage

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Choosing the right mortgage is a big decision that can make a huge difference to your financial health. With so many options available, it can be hard to work out which mortgage best suits your needs, especially if you’re a first time buyer.

That’s why we have come up with a list of top tips for choosing a new mortgage:

  • How much can you borrow?

  • How big is your deposit?

  • Repayment or interest-only?

  • Fixed or variable rate?

  • Watch out for mortgage fees

  • Do you qualify for a government scheme?

  • Mortgage overpayments

  • Mortgage penalties

  • Don’t forget to remortgage

How much can you borrow?

Mortgage lenders will typically lend between 4 and 5 times your individual income, or 3 to 4 times your joint income if you’re applying for a mortgage with someone else. Every lender has different criteria for the maximum amount you can borrow. Affordability is also important: if you already have a lot of debt on credit cards or other loans, your maximum mortgage may be lower.

You should also think about how much you want to pay per month on your new mortgage. If your mortgage repayments are greater than 30% of your take-home income, you may find yourself “house poor,” where you own a house but can’t afford to build up your savings, go on holiday, buy a new car, etc.

How big is your deposit?

The bigger your deposit, the less you have to borrow and the lower the loan-to-value (LTV) ratio, which means you’ll qualify for lower mortgage rates. The LTV ratio is the proportion you borrow compared to the property price. A £20,000 deposit on a £200,000 home is 10%, so the LTV ratio is 90%.

Repayment or interest-only?

With a repayment mortgage, your monthly payments are made up of interest and a portion of the amount borrowed. As you pay off the debt and the interest goes down, more and more of your monthly payments goes towards clearing your mortgage - until the whole loan is paid off.

With an interest only mortgage, your monthly mortgage payments are lower because they only cover the interest on the loan. Mortgage lenders will only let you get an interest only mortgage if you have another way to pay off the loan, such as savings, investments, or other assets.

First time buyers are unlikely to be offered an interest only mortgage, but many buy to let mortgages are of the interest only variety.

Fixed or variable rate?

With a fixed rate mortgage your monthly payments are the same for the duration of the mortgage deal. You won’t benefit if interest rates fall, but you also know your payments will not go up if rates do.

Variable rate mortgages – which include discount and tracker mortgages – can go up and down, usually in line with changes to the Bank of England base rate.

Watch out for mortgage fees

Sometimes, the mortgage with the lowest interest rate will have hefty set-up fees (say £1,000 or £1,500) attached. So it’s vital to work out the total cost of the deal over the period you expect to have it; if you’re planning to remortgage every two years to a new fixed rate deal, the fees can really add up. 

When you select a mortgage, do the maths and make sure it’s still a good deal after you include the fees. The APRC (Annual Percentage Rate of Charge) shows the total cost of the mortgage over the full term (usually 25 to 30 years), but if you want a 2 or 5 year mortgage that’s the period over which you need to compare the cost to find the right mortgage.

Do you qualify for a government scheme?

Before picking a mortgage or a home, check to see if you can take advantage of Help to Buy (Shared Ownership and Equity Loan), Right to Buy, Starter Home Schemes or Shared Equity Schemes.

Should you talk to a mortgage broker?

When deciding which mortgage to take out, you have two options: go direct to a lender, or get a mortgage through a broker. You might find a whole-of-market broker useful if your finances are complicated, your credit history is tarnished, or if you just want to make sure you’re getting the best mortgage rates. 

A whole-of-market broker is not tied to any banks, building societies, or lenders. This means they will be able to assess every mortgage available to offer you the best deal possible.

Mortgage overpayments

Most fixed and discount rate mortgages let you make overpayments of up to 10% of the outstanding balance each year. This means you’ll pay off your mortgage sooner, which can save you thousands of pounds in interest payments. However, beware of early repayment penalties…

Mortgage penalties

There are plenty of fees linked to taking out a new mortgage and most are unavoidable, including arrangement fees, booking fees, valuation fees and more. Most mortgage lenders charge exit fees of between £50 and £300 for closing your mortgage account, too. 

If you repay your mortgage early or overpay above what’s allowed you can also be charged an early repayment penalty fee. These are usually a percentage of the amount of the overpayment. So, if you go over the limit by £25,000, and the early repayment charge is 5%, you’ll be charged £1,250.

Don’t forget to remortgage

If you choose a mortgage with a fixed rate or discount rate that lasts for say 3 or 5 years, it’s usually a good idea to remortgage at the end of that promotional period. If you don’t remortgage, you’ll automatically start paying your lender’s standard variable rate (SVR), which is usually significantly higher.

You can either remortgage to a new lender – which takes 6 to 8 weeks and is just like getting a whole new mortgage again – or you can talk to your existing lender and ask them to switch your product to a new fixed rate or discount rate mortgage. This is quicker, but it is worth checking what other lenders are offering before deciding which mortgage is right for you.

29th May 2020