Your mortgage is likely to be the biggest financial commitment you make in your lifetime, but with so many options and choices on offer, it can be difficult to know where to start.
To find the mortgage that is right for you, it’s always worth comparing different types of mortgage and deals on the market. It’s not as straightforward as just picking the best headline interest rate though, so here we explain the key points you need to consider when comparing mortgages, and some questions to ask yourself to help you reach a decision.
Before you begin
Before you start comparing mortgages, it’s really important to work out how much you will be able to borrow and how much of a deposit you can afford to put down. The answer to these questions can make a big difference to which mortgage products are best for you, so it’s worth taking the time to work this out properly.
Generally, mortgage lenders are willing to lend you between four and four and a half times your salary.
1. Are you looking for a repayment or interest-only mortgage?
Making the decision between repayment and interest-only can make a huge difference to your monthly mortgage payments, and the total sum you are likely to pay over the mortgage term. Below we outline the key differences between the two to help you choose the right option for you.
Most residential mortgages are offered on a repayment basis, where your monthly payments are made up of a repayment of some of the amount you have borrowed as well as some of the interest you owe. If you choose this option you will pay off the mortgage in full by the end of your mortgage term.
Although the monthly payments for a repayment mortgage are higher than for an interest-only mortgage, the overall cost of a repayment mortgage will be lower. This is because as you chip away at the total amount you borrowed, the amount of interest you pay will also go down. This also means that if you chose to remortgage during your mortgage term, that you are more likely to get a good deal, as you should have more equity in your home than before (the proportion of money you have paid in versus what is outstanding on your loan).
A much less-frequently offered option for residential properties, interest-only mortgages, are exactly as they sound. Rather than paying off the amount you borrowed to buy your property, with an interest-only mortgage, you will only pay off the interest each month. This can make this a much cheaper option, but you will need to find a way to pay off the amount you borrowed, as when the term ends, the full amount you borrowed will be due.
The main advantage of an interest-only mortgage is that your monthly payments are much lower than a repayment mortgage. You will of course have to pay the full amount borrowed at the end of the term, and your lender will want to know how you plan to do this, whether it’s using funds from the sale of your property, or from savings and investments.
Interest-only mortgages do come with some downsides, so think carefully before applying for one. They tend to be more expensive in the long term as you are not driving down the amount you owe, which means that the interest you pay will continue to be based on the total amount you borrowed. Lenders will also want to check that you have a repayment strategy in place, and may want to see evidence at regular intervals that you’re on track to repay the capital you owe at the end of your mortgage term.
2. Should you go for a fixed or variable rate?
When comparing mortgages, the two main types of mortgage you’ll be able to choose from are those with a fixed rate of interest and those with a variable rate.
Fixed rate mortgage
A fixed rate mortgage is where you’re charged a set interest rate for a defined period of time. Most lenders will offer two, three or five year fixed terms, with some lenders offering even longer term deals – in some cases 10 years or more. Choosing a fixed rate deal provides you with peace of mind that means that the interest rate you’re paying will stay the same for this length of time, regardless of what happens to the Bank of England base rate during this period.
When your fixed rate deal ends, you will usually automatically roll onto your lender’s standard variable rate (SVR).This is often considerably higher than the fixed term rate you were paying, so it’s worth looking at whether you might be able to remortgage to a better deal when you’re approaching the end of of your fixed rate term.
The longer the fixed term you choose, the higher the interest rate is likely to be. This is because the lender is putting potential profit at risk by guaranteeing you a certain interest rate, which could well fall below the interest rates they offer new customers during the term. If interest rates go up during your fixed rate term,you’ll be protected from price rises, which benefits you but not your lender. On the other hand, if interest rates were to fall, you would be tied into the rate you agreed to and will essentially be paying more than you need to for your mortgage, as cheaper deals will become available elsewhere.
Variable rate mortgage
If you opt for a variable rate mortgage, your interest rate is not set and will fluctuate throughout the lifetime of your mortgage. A large number of variable rate mortgage lenders will base their rates on the Bank of England base rate, plus a certain percentage. For example, if a lender offers a tracker rate which follows the base rate plus another 1%, given that the base rate is currently 5.25%, this would make your current payable rate 6.25% (5.25% plus 1%).
There are a few different types of variable rate mortgage, which include:
- Tracker rates – As mentioned, a tracker mortgage usually will track the base rate set by the Bank of England, or sometimes a separate rate set by the individual lender, plus a set percentage. Currently tracker rates appear very attractive as interest rates are so low, but it’s worth noting that many tracker deals have a ‘collar’ below which the rate cannot fall.
- Standard variable rate (SVR) – this is the rate you will move onto once your fixed rate term, tracker or discount rate has ended. Each lender’s SVR will be different, but generally SVRs tend to be much higher than the rates on other types of mortgage, with the average SVR currently sitting at 8.18%, according to financial website Moneyfacts.co.uk.
- Discount rates – This is a rate that is set at a specific percentage below a lender’s SVR. So for example, if a lender’s SVR is 8.18%, and your discount is 1%, you will effectively pay a discounted rate of 7.18% for the duration of your discount rate term.
The main advantage of variable rate mortgages is that if interest rates are particularly low, you could pay less for your mortgage than you would if you’d opted for a fixed rate deal.
However, it’s important to understand that you’re not protected against interest rate rises, so if rates do go up, you could end up paying a lot more for your mortgage. It’s important to make sure you’d be able to handle an increase in monthly repayments should this happen.
3. Have you checked the mortgage fees?
When you take out a mortgage, you need to look at more than just the interest rate on offer. There are a number of fees associated with any mortgage, so you will need to take these into consideration when managing your budget.
Typically, mortgage costs and fees could add up to anything from £400 to well over £3,000, depending on the type of property you are buying, its value, and the kind of mortgage you’ve chosen. While some of the fees are due upfront when you complete on your property, you may be able to add some to your mortgage. However, bear in mind that you will be paying interest on anything you add to your mortgage, which could end up costing you more in the long run.
The most common charge you’ll face is a mortgage arrangement fee. This is charged by lenders to set up your mortgage, and it’s also known as the product fee or completion fee. As a general rule, the lower the mortgage rate, the higher the fee. So while the rate may be attractive, sky-high arrangement fees can make a big difference to your overall costs.
In addition to the mortgage fees you might need to pay upfront, there may also be fees attached to payments during the mortgage term. While you may not need to ever pay these fees, it’s worth knowing what your lender charges as it may make a difference to how you manage your mortgage. For example, if you plan to pay off your mortgage sooner, you would want to look for a lender with low early repayment fees. These fees will usually include:
- Missed payment charges – if you miss a monthly payment or pay late, you may be subject to a penalty charge.
- Early repayment fees – If you want to pay off your mortgage in its entirety or remortgage before your current deal finishes you may need to pay early repayment charges. These are usually to cover the cost of the loss of interest for your lender. Most lenders will, however, allow you to pay back up to 10% of your mortgage balance each year without penalty.
- Exit fees – When you pay off your mortgage and close your account, you can sometimes be charged an administrative or exit fee to process this.
You can find out more about the various mortgage charges you need to watch out for in our article Mortgage fees and costs explained.
Some final things to consider
If you’re ready to start comparing mortgages, this mortgage comparison tool enables you to compare more than 15,000 mortgages from over 90 different lenders in minutes.
If you are unsure about anything it can be good to speak to a mortgage broker or advisor to make sure you find the best deal for you based on your individual circumstances. Find out more in our article Should I get advice on my mortgage?
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.