Securing the right mortgage has the potential to save you £100s each month, hence why using a mortgage broker is recommended. You of course have the option of approaching your bank for their cheapest deal but, with such a small range of products, it is very unlikely that you will walk away with the most competitive rate available to you.
If you do use a mortgage broker, the following points will all be discussed to ensure you end up with a product that is both competitive in rate and appropriate to your current and future goals.
As I’m sure you already know, a mortgage is a loan that you take out to buy a property. What you may not be aware of are the different choices and types of loans;
Unless you can provide a clear and credible repayment plan for an interest-only mortgage (and have good reason for wanting to explore this route), a repayment mortgage will more than likely be your best and most achievable option.
With a repayment mortgage, your monthly payments go towards both the original loan and the interest on your mortgage. The amount you pay each month will result in you paying off the full balance of the mortgage by the end of the agreed term (typically around 25 years). Once your mortgage is paid off, you will own that property outright.
With an interest-only mortgage, while the payments may be significantly lower, they only go towards paying off the interest on the loan, so the balance does not go down. When you get to the end of your mortgage term, you will have to pay the balance of the mortgage in a lump sum – most often achieved by the sale of the property.
A fixed rate mortgage means that your interest rate will be fixed for an agreed time (usually 2 or 5 years, although there are other options). Your monthly mortgage payments are guaranteed to remain the same until that date passes, at which point you will go on to your lender’s variable rate or you’ll remortgage on to a new fixed rate deal (read more about remortgaging here).
With a variable rate, as implied by the name, your monthly payments can fluctuate up and down. There are different types of variable rate mortgages and, while they used to be popular, fixed-rate mortgages are often the preferred choice. At a glance, here are some pros and cons of each option;
Regardless of rate changes, your payments won’t change.
You know exactly what will come out of your account each month.
You'll have more certainty regarding your monthly budget compared to variable products.
Starting rates may be higher than variable products.
You won’t benefit if interest rates fall.
Early Repayment Charges are usually quite high if you wanted to come out of your mortgage early.
If interest rates fall, your mortgage rate will likely drop too.
Unlikely to have Early Repayment Charges, so no penalty if circumstances change and you want to pay the balance off early.
If interests rates increase, your mortgage rate is likely to increase too.
Uncertainty – not as easy to budget/plan when compared with a fixed product.
With choices available from 2 up to 15 years, it’s very easy to overlook the importance of choosing the right option here – and that could end up being costly.
As mentioned previously, fixed rate products tend to come with hefty penalties for repaying early. Therefore, it is so important to think about your future plans and how long you plan on being in your property. If you think you’re likely to move again in a few years’ time, don’t tie yourself in to 5+ year fixed deal. Charges for repaying early can be as much as 5% of the loan amount!
The advantage of opting for the longer terms is the certainty it brings – no matter what happens to the UK economy, you know your mortgage payments will remain at the monthly amount you already deemed affordable.
Again, a decision often overlooked, is how long you want your mortgage to run for (beyond any incentive/ fixed-rate periods).
The most common term is 25 years or there abouts, but people often pluck that figure out of the air without giving it any real thought.
If you shorten the term then yes, your monthly payments will increase, but you’ll pay less interest overall.
Age is also a factor here and sometimes takes the decision out of your hands anyway. Some lenders will not allow for terms to extend into retirement, for example. There are some lenders that offer this, but you need to make sure that you’re confident that you’ll be able to maintain the monthly payments.
FREQUENTLY ASKED QUESTIONS
How long can my mortgage last for?
Typically, you can choose to have your mortgage last for a term that takes you up to your 70th birthday although this can vary slightly from lender to lender. However, most people don't like the thought of still being tied into a mortgage up until that age and will opt for a shorter term that still fits within their affordability. On average, we see most clients opt for a term of around 25 years.
Can I pay off my mortgage early?
If you find yourself in a position of being able to pay your mortgage off early you can of course do so. However, it's worth checking your current plan for any Early Repayment Charges (ERCs) to make sure 1) there are no nasty surprises and 2) that it's definitely in your best interest to do so.
What happens if my circumstances change and I'm struggling to pay my mortgage?
The first thing to do is contact your mortgage lender as soon as you realise you're in financial difficulty. Making them aware of situation gives them a chance to find a suitable solution for you both. This could be temporarily lowering your rate, giving you a temporary repayment holiday whereby you make no payments for an agreed length of time or switching you to a new product if appropriate. We know how stressful it is to find yourself in these circumstances, we've put together a short article here that you may find useful.
How long should I fix my mortgage for?
This will depend on your current circumstances and your future plans. When it comes to fixed mortgages, it's important to consider how long you wish to stay in that property and to not fix the mortgage beyond that point or risk being hit with an early repayment charge.
What is 'LTV'?
LTV in the mortgage world means 'Loan to Value'. It is a ratio term based on what percentage of the property value is being loaned as a mortgage. For example, if you were purchasing a property worth £400,000 and needed a mortgage of £200,000 your LTV would be 50%.
How do Early Repayment Charges work?
ERC policies very from lender to lender and product to product but can be broadly described as a penalty lenders charge if you overpay or pay your mortgage off in full outside of the agreed terms. You'll be able to view your specific ERCs on your mortgage offer document. Most commonly, ERCs work on a tiered system whereby you'll owe a fixed % if you repay in the first year, a lower % if you repay in the second year and so on. Typically, you'll be looking at a charge of around 1-5% of the total amount being paid.
What will happen to my mortgage if I want to move house?
If you want to move house before your mortgage deal expires, you may be able to 'port' your mortgage to avoid ERCs. Porting your mortgage simply means moving your existing mortgage over to your new property. In theory, the ability to port seems to offer great flexibility however there are no guarantees that the lender will allow it or if it is actually a suitable option for you. You can read more about porting your mortgage and alternative options here.
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