Mortgage services can be a minefield for even the experienced buyer, with potentially thousands of home-loan deals available. Choosing the correct deal for you will depend on the size of your deposit, your income, your circumstances, and your ability to predict the future and the behaviour of banks, building societies and Bank of England base rate of interest. What may be perfect today could be restrictive tomorrow – or vice versa. The Money Advice Service can advise you on shopping around and a mortgage calculator, such as this one, can help you budget.
Here are a few other tips to stop you making a decision you’ll regret.
Research
Under new rules introduced in 2014, lenders and brokers must offer advice by recommending the most suitable mortgage depending on your circumstances. These are just a few of the changes to be implemented following the Mortgage Market Review (MMR), which was conducted by the Financial Conduct Authority. So it’s worth looking at comparison tables online, talking with your current lender, and then bringing any ideas which look interesting to the broker for their opinion. You do not need to take their advice.
There will be some people who want to pay off the loan as quickly as possible, and will be able to take on a mortgage to be paid off within 20-25 years, or less. Others will just want to get on the ladder and will be happy to pay a mortgage for the next 35 years. To some degree this will depend on the value of your deposit, so try tosave for one large enough to give you a range of mortgage options. Typically, the lower the deposit, the higher the interest rate.
For both, the type of mortgage you take at the outset may only apply for a few years, before it changes to the lender’s Standard Variable Rate of interest. Most people remortgage every time the initial two, three or five year period ends, to avoid a higher rate of SVR, so even if you take out a loan which rapidly turns out to be the wrong one, at least you can change after this period. This should not be viewed as a comfort blanket however, because making the wrong decision could still cost you dearly for those initial years.
One major factor will be the choice of fixed versus tracker mortgages. Repayments of a fixed-rate mortgage will not go up during that initial period so there will be no nasty surprises. But if competitors drop their interest rates and you’ve signed up for a long-term fixed loan you will not be able to swap over and reap the benefits.
The other option is a tracker, which will mirror interest rates set by the Bank of England – if those interest rates rise, so do yours. This rollercoaster ride is more of a gamble and could save you hundreds of pounds a month, however, a rise of just 1% would push thousands of homeowners into mortgage arrears, as explained in this BBC report of comments from UK Asset Resolution.
The ideal option would be a long-term, low interest mortgage. But if you did need to change the mortgage for some reason (selling the home, for example) you may need to pay an early repayment charge.
The last option is an interest-only mortgage, where the buyer pays off just the interest and therefore a lower amount each month, while perhaps saving elsewhere at their own rate to pay off a mortgage lump sum at the end. Following the MMR most lenders now ask to see evidence of a long-term strategy.
The right mortgage for you therefore depends on a range of factors, and not all of them are financial: your own personality and lifestyle may be just as important.
