Whether you’re looking to get your first mortgage, or you’re selling up and looking for somewhere larger, if you’re like most people, you will probably need to get a mortgage to help you pay for your new home. In this regard, the key is to do your homework and begin to understand what mortgage opportunities are out there and which ones suit your particular circumstances.
Entering into a mortgage is a serious financial commitment so getting it right is crucial. You’re probably going to be stuck with it for the next 20 to 30 years so choosing the right mortgage can be daunting (especially given the plethora of mortgage jargon that exists out there).
Just remember, one of the most important things to consider is whether or not the mortgage is affordable both now and should something happen in the future to affect your income. Think about the repayments and whether or not they will put you under too much stress each month. Having a couple of tight months can be bearable but when you have around 300 payments to make over a 25 year period you need to be sure you aren’t getting yourself into something that becomes unbearable in the long run.
Choosing the right mortgage isn’t always straight-forward but if you do your research and get some advice you’ll soon be on your way to getting the keys to your new home.
Here are our top tips for finding the right mortgage for you:
1. Review your finances.
First of all, it’s important to remember that not every one is eligible for a mortgage and you should consider whether or not you are in a good enough financial position to apply for one. So before you even make enquiries about a mortgage make sure your finances and credit score are as good as they can be.
The higher your credit rating the better position you’ll be in for negotiating the best mortgage deal, however, if you have a poor credit score this may result in you being turned down by a mortgage provider. The best thing to do is to check your rating for yourself, and this can be online using various websites such as Experian and Equifax.
The irony is that a low credit rating can be caused by a lack of credit history as much as having a bad credit history. In reality a lending institution is looking for evidence of your ability to stick to your financial commitments and continue to make repayments. If you have never had credit this can actually go against you. If you are in this position you may want to look at how you build a credit score so that when you apply for a mortgage you have a good history of credit repayments. Perhaps if you have never had a credit card you may want to take out one, spend some money on it and pay it back within the interest free period. Lenders like people with a history of borrowing money and paying it back on time when they have said they would.
If you have a lot of personal debt such as multiple credit cards and personal loans you may want to look at how you consolidate your debt to ensure you reduce the interest being paid and maximise the amount you are paying off each month.
Aside from credit scores, the next big thing you want to do is review your income and see what size of mortgage you can actually afford. But don’t necessarily take this at face value. You must be realistic and assess what you can really afford - taking into account your outgoings and typical lifestyle commitments. You don’t want to apply for a mortgage based on a false set of monthly outgoings because if your application is successful what would life be like if you have little to no spending money for doing the things you enjoy, like eating out or playing golf?
Finally, when you are considering what shape your finances are in look at any savings you might have to see what sort of deposit you could put down on a house. Generally speaking, deposits are between 10% and 20% of the house price, although, if you can manage a higher deposit (between 40-60%) you will normally be eligible for a better rate of interest and ultimately reduce your monthly repayments.
2. Decide on the type of mortgage.
There are two main types of mortgage - repayment or interest-only - and deciding which one is the right one for you is a matter of personal taste.
A Repayment mortgage, sometimes known as a ‘Capital and Interest mortgage’ simply means you will pay a portion of the amount borrowed (capital) and any interest on the amount borrowed each month. At the end of the agreed term, which is typically 25-30 years, the amount borrowed will have reduced each month to the point that you will have paid it all off and own your home. A major life goal for many of us!
With an Interest-only mortgage, each month you will only pay the interest on the loan but nothing off the capital (the amount you borrowed). It’s worth noting, however, that these mortgages are becoming less common and much harder to come by. Don’t worry this isn’t some crazy loop-hole which allows you to avoid paying for your house, it just means that come the end of the mortgage period you will be expected to be in a position to clear the balance of the mortgage. This is usually through some form of investment or an endowment savings plan.
You also need to decide if you want a fixed rate, variable, tracker or capped rate mortgage.
With a fixed rate you will know exactly what your mortgage repayments will be for a designated amount of time (usually between 2 and 5 years). For some people this can offer the peace of mind they need, however, this usually comes at a price as the rate of interest tends to be higher than if you were to opt for a variable rate mortgage. An Early Redemption Charge may apply if you try to pay off a fixed rate mortgage early or move the mortgage to another institution.
When it comes to a variable rate mortgage, interest rates can go up, as the name would imply, and down depending on the various factors in the economy. They shouldn’t fluctuate too radically but be sure your budget can cope if interest rates decide to take a hike. Variable rate mortgages typically have no Early Repayment Charges and often have lower Arrangement Fees.
As the name suggests, a tracker rate mortgage will usually ‘track’ the movements of the Bank of England’s Base Rate rather than your Bank’s own rate. Instead of having a variable rate mortgage which will move if your Bank changes their interest rates the tracker mortgage will track any movements by the Bank of England. It will be worth checking if the tracker mortgage has a ‘collar’ which the rate will not go below as this could mean that if rates fell significantly your interest rate may be stuck at a set level which it can’t move below - effectively keeping your repayments artificially high.
A capped rate mortgage is a variable rate mortgage which will go down as interest rates fall, however, if interest rates should start to rise there will be a cap in place which will stop your mortgage interest rate (and your mortgage repayments) from going up. Capped rate mortgages usually have a slightly higher rate of interest than a standard variable rate mortgage owing to the security against rising interest rates. They will also have a term such as one year, two years or three years and will then revert to the standard variable rate.
3. Shop around.
There is plenty of choice out there when it comes to looking for a mortgage and you will have many options ranging from dealing directly with a Bank of Building Society or going through an Independent mortgage broker to help find the right mortgage for your requirements. Looking online at the likes of MoneySupermarket.com and MoneySavingExpert.com will also help you to understand what’s available at that particular time.
Although it might be tempting, don’t go for first mortgage offered to you. Ask friends and family for their opinions on the different types of mortgage available and perhaps ask if they know of any special deals out there for lenders who have a particular preference or approach. Ask about their mortgage rates and the fees involved and do a comparison of at least two or three different lenders. Fees may include commission, appraisal, credit report, and application fees so be sure you build this into your budget. You don’t want to get too far into a mortgage application to then find that there is an excessive Arrangement Fee or perhaps a punitive lock-in period.
Take your time to deliberate and decide on the amount you think you can borrow comfortably and the types of mortgage that will suit your circumstances before you invest too much time and effort house hunting. Know your limits and talk to one or two lenders / brokers to get an idea on the size of mortgage they could borrow and perhaps ask for an Agreement in Principle on the amount a lender will lend you.
Start to get your paperwork in order early so that when you finally find your dream home and have an offer accepted you can move quickly to get your mortgage in place. The last thing you want is to find your new home, have your offer accepted and then fail to secure a mortgage.
Choosing a mortgage is not always an easy decision but we hope we have given you food for thought and armed you with practical advice to help you on your way. There are a lot of different factors to take into consideration and if you are not in the best financial position you might feel you have to jump through lots of hoops to get accepted for a mortgage. If this is the case there are other options available such as co-ownership, but as ever take your time and do your research and know your limits to keep a lid on any potential stress. Deciding to take out a mortgage is a long-term commitment and one which you don’t want to take lightly. Take the time to avoid any mistakes as you are going to be stuck with it for many years to come. On the other hand, get it right and you will be moving into your new home before you know it!
Disclaimer: This article is for information purposes only and does not constitute legal advice or otherwise. Please ensure you take professional legal advice become committing to any legal process.