Finding the Right Mortgage
The mortgage market is incredibly competitive and it can be hard to understand what exactly is on offer. There are many different providers and a wide range of products and rates available, so it’s a good idea to talk to an expert in the market before deciding what’s right for you. This section gives you an insight into the types of mortgages available, the fees you’ll need to spend and how to repay your mortgage.
Types of mortgages
A First Mortgage advisor will take you through all the different mortgage options and advise on which one best suits your circumstances. Below we explain the differences between repayment and interest-only mortgages, fixed and variable interest rates, and all the different types of mortgages offered by lenders.
Repayment or interest-only mortgage
No matter the rate or type of mortgages, they will always be repayment or interest only. These are terms to describe how you are paying off the mortgage – as you go (repayment) or in one lump sum at the end (interest only).
With repayment mortgages, you pay the interest and part of the capital off every month. At the end of the term, typically 25 years, you should manage to have paid it all off and own your own home outright.
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the amount you borrowed). As you are only paying off the interest, you need to have a plan in place to pay off the rest of the loan at the end of the mortgage term. Interest-only mortgages are seldom offered due to the difficulties involved in making the lump-sum payment, but they may still be an option for some to consider.
Fixed or variable rate mortgage
After you’ve worked out whether to pay off both capital and interest (repayment) or just the interest (much rarer these days), you can then look at paying a fixed or variable rate mortgage.
With a fixed rate, the interest you’re charged stays the same for several years. The amount you pay will be the same throughout the deal, no matter what happens to interest rates. These mortgages are often referred to as ‘two-year fixed’ or ‘five-year fixed’, dependent on how long the rate is fixed for. On the plus side, you know exactly where you are with a fixed rate, helping you to budget your monthly spend. On the down side, fixed rates are usually slightly higher than variable ones, and if interest rates fall, you won’t benefit.
A variable rate mortgage is just that – variable – with the amount you pay liable to go up or down if the lender changes the interest rate. The advantage of a variable rate is that you can usually overpay or leave at any time, and your interest rate could decrease, meaning you pay less. However, interest rates could also go up at any time, meaning you end up paying more.
Standard variable rate (SVR) mortgage
This is the normal interest rate that mortgage lenders charge homebuyers, and it will last as long as your mortgage or until you take out another mortgage deal. Changes in the interest rate may occur after a rise or fall in the base rate set by the Bank of England, but the lender chooses the rate.
Tracker mortgages shadow another interest rate, normally the Bank of England’s base rate plus a few percentage points. If, for example, the base rate goes up by 0.5%, your rate will go up by the same amount. Usually tracker deals have a short lifespan, typically two to five years, though some lenders offer trackers which last for the life of your mortgage, or until you switch to another deal. If the rate the mortgage is tracking is low, your mortgage payments will also be low. Equally, if the rate that your payments is tracking increases, so too will the amount you pay each month. Tracker mortgages are a riskier prospect and you may have to pay an early repayment charge if you want to switch before the deal ends.
Pros: If the interest rate is low, so is your mortgage payment.
Cons: You don’t necessarily pay the same amount each month – and payments can go up.
This is a discount off the lender’s standard variable rate (SVR). They usually only apply for a limited length of time, typically two or three years. The advantage of a discount mortgage is that you have lower payments at the start of your mortgage, when many people want to keep monthly repayments as low as possible. And, if the lender decides to cut their SVR, your mortgage payments will go down too. Of course, the lender could also decide to increase their SVR, in which case your payments go up.
Pros: Lower payments at the start of your mortgage.
Cons: Limited terms and if lenders increase their SVR, your mortgage payments go up too.
Capped rate mortgage
These are a bit like tracker mortgages, in that your rate moves in line with the lender’s SVR, but the cap means that the rate can’t rise above a certain level. Although the rate is generally higher than other variable or fixed rate mortgages, it will fall if the lender’s SVR comes down, meaning your payments could fall too. Of course, payments could rise instead, but you can be certain of the maximum amount you may have to pay because of the cap.
Pros: The cap on the rate means you know exactly what your maximum payment could be.
Cons: Rates are generally higher than variable or fixed rate mortgages.
These mortgages work by using any money you have in savings or current account as overpayments against the interest you pay on your mortgage each month. Your mortgage lender calculates the interest you owe based on the total amount you have borrowed, but with an offset mortgage, this amount is reduced by the amount held in the linked accounts. So, if you have borrowed £250,000 and have savings of £35,000, you will only be paying interest on £225,000.
Pros: You could end up paying a lot less interest on your mortgage.
Cons: You must keep a minimum amount in your linked account which might make your money less accessible.
If you buy a house to rent out, you can’t take out a standard residential loan. While a buy-to-let mortgage is similar in many ways, there are some important differences. You’ll generally have to put down a bigger deposit (usually a minimum of 25%) and interest rates are higher.
Lenders work out how much you can borrow based on expected rental income rather than your personal income, with most lenders expecting a rental income equal to 125% of your annual mortgage payments. Most banks and building societies will insist on a minimum age and income and have stricter eligibility criteria, reflecting the greater risk of buy-to-let loans. Statistics show that borrowers are more likely to default on a buy-to-let than a residential mortgage.
Pros: Buy-to-let mortgages allow you to rent out your property. You could profit from the rent you charge.
Cons: Rates for buy-to-let mortgages tend to be higher as the risk of lending is greater.
For more information and advice on renting out a property see Becoming a landlord.
Capital raising mortgage
Many people choose to remortgage their homes to release funds for everything from house renovations and holidays to new cars and consolidating debts. In some cases, the rates to repay a mortgage are less than those to repay a loan, so consolidating loans and paying them off as part of your mortgage makes sense. You end up paying more on your mortgage over a greater amount of time, but avoid paying high interest rates on loans.
Pros: You could end up paying a lot less interest on your debts by consolidating and paying them off as part of your mortgage.
Cons: You add to the length of time you need to pay your mortgage.
For more information and advice on borrowing money through a mortgage see Guide to additional borrowing.
Student or graduate mortgage
Banks and building societies now offer students the chance to buy rather than rent with mortgages up to 90% of the value of the property, as long as they have a guarantor to back them up (usually a parent or grandparent).
Schemes like Buy for Uni offer anyone who’s over 18 and in full time education the chance to buy a home, paying the mortgage by renting out rooms (or using a guarantor to make up any shortfall). Similarly, graduate mortgages offer low deposit schemes, accounting for the debt that may have been built by students.
Pros: Allows you to get on the property ladder as a student and invest rather than spend money on rent. As the property is in the student’s name, guarantors do not pay additional stamp duty.
Cons: Interest rates tend to be higher. You need to have a guarantor who owns property to qualify.
Part and part mortgage
These are mortgages that combine both interest-only and repayment portions of a mortgage: you can decide what proportion of each to pay, for example 80% repayment and 20% interest only.
Pros: You can keep your payments relatively low as you pay a proportion of interest-only, but you are still paying off some of the capital, leaving you less to pay at the end of the term.
Cons: The interest rate will be slightly higher than more straightforward mortgage packages.
Poor / bad credit mortgage
If you have had CCJs, bankruptcy, arrears or defaults in the past, you may be worried that you have messed up your chance for a mortgage. However, bad credit mortgages may still be available. First Mortgage advisors can find the best package for your circumstances, even with a complex financial history.
Most lenders take into account evidence of a poor credit history. This means that some will not be prepared to offer you a mortgage if you have a bad credit record. However, there are specialist lenders who will consider lending to you, even if you have examples of arrears, defaults or even bankruptcy in your past. You may have to pay a slightly higher rate than someone with good credit history, as the lender will see it as a larger risk to lend the money.
Pros: Allows you access to a mortgage even if you have a bad credit history.
Cons: Higher interest on payments as you are seen as a greater risk.
Costs and Fees Associated with Moving Home
This is probably the most important payment in the property buying process. It is your contribution towards the price of the property you are buying. You’ll need at least 5% of the purchase prices to get a mortgage – but the more you can afford to put down as a deposit the better. This is because lenders will see you as less of a risk and offer you better deals. With deposits of 40% of the property price or more, interest rates for borrowing the rest of the money become much lower.
Stamp Duty / Lands and Building Transaction Tax
If you spend more than £125,000 (£145,000 in Scotland) on a property, then you will be taxed on that purchase. In England and Wales this is known as Stamp Duty, in Scotland it’s Lands and Building Transaction Tax (LBTT). You don’t have to pay it before you buy your home, but you do need to know you have enough saved to pay it once you own your property. You generally have 30 days from the time you’ve bought your property to pay it. The tax is between 2% and 12% of what you paid for your property, so will vary depending on what you spent.
Once you have a mortgage in principle, your lender will check that the property you’re buying is worth the price you’re paying. They may use the valuation carried out in the Home Report produced by the seller, or, more likely, they will arrange a mortgage valuation. You will pay them to value your property. You can then decide if you want to get your own surveys to find out what sort of condition your future home is in and how much it might cost to make good any areas that aren’t up to scratch. Your options are:
Home condition survey – the cheapest and most basic survey, suitable for new-build and conventional homes, but not useful for spotting any issues with the property.
Homebuyers report – a more detailed survey looking thoroughly inside and outside a property. It also includes a valuation. You might be able to get the valuation and homebuyer’s report done at the same time to cut costs.
Building or structural survey – the most comprehensive survey suitable for an older building or one that’s not a conventional build – such as a timber construction or a house with a thatched roof.
You will normally need a solicitor or licensed conveyor to carry out all the legal work when buying and selling your home. In Scotland, you’ll need a solicitor to put in an offer on a property; elsewhere you do this through an estate agent. Solicitors are responsible for negotiating and checking the contract, organising the transfer of the Title and money and conducting searches on your property (which basically means checking for any local plans or problems that might affect your property).
Legal fees are typically £850-£1,500 including VAT at 20%. You also need to add on fees for searches which cost around £250 – £300.
We recommend using a solicitor from our Property Law Centre.(link to ‘what a solicitor does’ and info about PLC)
Electronic transfer fee
The electronic transfer fee covers the lender’s cost of transferring the mortgage money from their account to the account of the seller’s solicitor. It usually costs around £50.
These will vary depending on how much you must move and the location of your new home. As a guide, an average house move costs between £300 and £600. You could get better rates if you move during the week rather than at a weekend. See our Guide to Moving for more information.
Mortgage costs (which you can pay upfront or pay over time)
As well as the monthly payments you make to pay off the money you’ve borrowed to buy a property, there are several costs before you start. These might include a booking fee of £99-£250, an arrangement fee of up to £2,000 and a mortgage valuation fee (typically £150 or possibly more).
It’s best to pay these upfront rather than adding them to your mortgage, otherwise, you’ll be paying interest on them for the life of the mortgage. If you’ve ported your mortgage instead of getting a new one, there may be charges for porting the account.
Maintenance costs (what you pay to look after a home)
If you’ve been renting before and this is your first home, you will need to budget for additional areas that you may not have needed to consider before. If you’ve moved into your own place for the first time, you’re likely to make changes and want to decorate – the average spend of new homeowners in the first year is £10,000 (Source – Aviva survey 2015).
The first and most important ongoing payment is your mortgage: if you’ve chosen a fixed rate product then you’ll know what to budget for each month. However, if you are on a variable rate it might be wise to keep a little extra by each month in case of rate increases.
Beyond paying your mortgage and regular maintenance and repairs, there’s council tax, running costs such as utilities, phone and broadband, plus any leasehold fees if these apply.
It is also essential to invest in insurance for both the property and its contents and protection for you and your income. None of us knows where life is going to take us and having insurance and protection means you won’t have to worry about money should you experience major life changes.
Repaying your mortgage
There are three parts to a mortgage:
- First there’s a deposit, which is the chunk of money you pay towards buying your property.
- Then there’s the capital – the amount you’ve borrowed.
- And finally the interest – that is the money charged to borrow the capital.
When talking about mortgages, you might hear people mentioning ‘Loan to Value’ (LTV). Put simply, this is the amount of your home that you own outright, compared to the amount that is secured against a mortgage. For example, if you pay a £20,000 deposit on a £200,000 property, your LTV is 90% (as the deposit is 10% of the value of the property – your mortgage is secured against the 90% portion). Lenders are likely to offer you lower interest rates if you have a lower LTV, as they are taking a less of a risk with a smaller percentage of the property as security.
With most mortgages, you pay off the capital and interest monthly over 25-30 years, which is why they’re called repayment mortgages. With others, you can pay only the interest each month, but you then need to have made arrangements so there is a lump sum saved to pay the mortgage off at the end of the mortgage term.