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.

 1.       Type of Mortgage

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;

Repayment vs Interest Only

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.

Fixed vs Variable

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;

Fixed

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.

Variable

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.  

2.       Length of Deal (fixed rates)

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.

3.       Term of Mortgage

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.