How to find the right mortgage deal
When you take out a mortgage, the number one question is usually, ‘How much will I have to pay each month?’ The answer depends of course on how much you borrow – but also on what mortgage deal you have.
Here you can find out more about the different types of mortgage deal such as fixed rate, tracker, capped, discounted and variable.
How do mortgage rates affect me?
A mortgage deal is the agreement you have with your lender, covering the initial rate of interest you will pay, and how long you’ll pay this rate for. Remember that a deal may not last for the whole period of your mortgage – most fixed-rate deals last between two and five years, though a few do run for longer.
How do I get a good mortgage deal?
Getting the right mortgage deal for you depends on both your attitude to risk and your circumstances, including your credit score. If you are in a strong financial position with a large deposit, or are prepared to pay a higher arrangement fee, then you should be offered a better range of deals to choose from. However, if you have only a small deposit, and cannot (or don’t want to) pay a big arrangement fee, then your choice will be more limited.
Comparing different types of mortgage deal
The risk when taking out any mortgage is that interest rates may rise in the future, increasing your monthly repayments – perhaps until you can no longer afford them. This is why many buyers try to limit their risk through their particular mortgage deal. Here are the main types of deal available, and their pros and cons.
Suitable for: First-time buyers, more cautious people
With a fixed-rate mortgage, you know exactly how much interest you will pay for the length of the deal period. The only downside is that if mortgage rates fall, you will be stuck paying the same rate of interest. Once a fixed-rate deal ends, the interest you pay will switch to the lender’s Standard Variable Rate (SVR), which may be higher and less predictable. At which point, you may decide to try and remortgage to get a new deal.
Suitable for: Those who want lower interest than a fixed-rate, but could afford to pay more if necessary
A tracker mortgage moves in line with an external interest rate (usually the Bank of England base rate), and may be set slightly higher or lower. The main advantage is that it falls when the tracked rate falls, but on the downside there is no limit to how high it can go.
Suitable for: Those looking for the lowest rates, but who could afford to pay more and can cope with unpredictability
Discount mortgages may offer some of the lowest rates available, so can be very attractive initially. However, the discounted period is limited, and the mortgage tracks the lender’s SVR rather than the base rate. This can mean rate rises are higher and far less predictable.
Suitable for: Those who could afford to pay a lot more if necessary, or those unable to obtain any other kind of deal
Variable mortgages follow the lender’s SVR, which may rise even if the Bank of England’s base rate does not. Initially interest rates may be affordable, but be aware that these can rise significantly and without warning.
Suitable for: Those with variable income but substantial savings
Popular among self-employed people and those whose income fluctuates, an offset mortgage is a special kind of deal that lets you use your savings as a kind of ‘counterbalance’ to your mortgage. You keep your savings in a special account run by your mortgage provider, and the amount is subtracted from the amount of your mortgage on which you have to pay interest. So if you have a loan of £150,000 and there are £20,000 in savings, you’ll only pay interest on £130,000.
Offset mortgages may also be a way for parents to help their children obtain a mortgage.
What about mortgage fees?
When taking out a mortgage you will have to pay fees – ranging from quite small to very substantial, depending on the deal being offered. Types of fees may include:
Arrangement fee – this is the biggest variable. Some mortgages have no arrangement fee, while others run to a few thousand pounds. Some buyers add this fee to the mortgage if they can’t spare the cash up front – but if you do this, you’ll pay more over time due to interest.
Booking fee – when you agree a deal, you often have to pay a fee upfront to secure it. Expect this to be between £100 and £200.
Valuation fees – this is a standard check your lender will carry out on the property to make sure it’s worth the price you are paying for it. The cost of this is about £300. Note that although this valuation is a type of survey, it is no substitute for hiring your own surveyor.
Finding the best all-round deal
As you can see, there are lots of factors to balance out when looking for the best mortgage deal. An independent mortgage adviser can explain all your options to you, help you weigh up the pros and cons, tell you how much you’ll be paying now and if interest rates rise, and enable you to make a truly confident choice. Most importantly, they can search the whole of the market to find the best deal for you, and maximise your chances of your application being accepted.
Here you can see some real-life mortgage advice in action:
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