The world of mortgages can seem daunting and complex at first glance, with several different types of mortgage available and several different providers all claiming that their deal is the best.
We’ll give you a rundown of the basic facts about mortgages including what they are, what different forms they come in and what kinds of things you should be considering when you want to take one out.
By the end of this guide you’ll know your arrangement fees from your valuation fees and your variable rates from your tracker rates and will be well on your way to taking out a great value mortgage on your chosen property.
What is a mortgage?
Put simply, a mortgage is a loan given out to help a customer buy a property whereby the property in question is put up as security.
The loan is then paid off gradually over time with the exact method of repayment depending on the type of mortgage taken out.
Things to Consider When Picking a Mortgage Deal
First things first, you’ll want to work out how much you can actually afford to borrow without struggling to keep up with regular monthly repayments.
Things that will be affected by the amount you can afford to put towards repayments will be:
- The length of term (i.e. how long you want to borrow the money for), and
- What kind of mortgage you want to take out (i.e. a full repayment mortgage, or an interest-only mortgage – we’ll explain the difference in the next section)
You’ll also want to think about how you want your interest rates worked out. There are three basic options here:
- Variable rates
- Fixed rates, and
- Tracker rates
Again, we’ll go through the details of each in the following sections.
The flexibility of your repayments should also come into consideration here, as it’s likely that you’ll want the option to pay off chunks of your mortgage in lump sums if you happen to come into enough money to do so. This is called making overpayments.
What different basic types of mortgage are available?
There are two basic kinds of mortgage product you can take out, differing in terms of what your monthly repayments consist of:
- Repayment mortgages, and
- Interest-only mortgages.
When you take out a repayment mortgage, each monthly payment is made up of a proportion of the total value of the loan (the capital) plus interest. You’ll also have the option of making overpayments as and when you can or want to thereby reducing the amount you have left to pay.
The benefit of these kinds of mortgage is that you can guarantee that by the end of the term, the entire mortgage will be paid off, and so repayment mortgages are considered to be fairly low-risk.
When you take out an interest-only mortgage on the other hand, your monthly repayments consist only of the interest, and then you pay off the remaining capital by or at the end of the agreed term. Those who do this generally also pay into a savings account of some kind regularly in order to make sure that they have enough cash to pay off the capital.
There is a further option available in the form of offset mortgages. With these, your savings account and your mortgage are combined such that any money in your savings account can be used as temporary overpayments. You will still be able to access your savings while at the same time making savings on your mortgage repayments.
How are interest rates worked out on mortgages?
When it comes to paying interest on mortgages, there are three basic options available:Variable Rate
Each mortgage lender will have a standard variable rate (SVR) of interest, varying quite significantly from provider to provider. Each lender’s SVR will change more or less in line with (while staying consistently higher than) changes in the Bank of England (BoE) base rate. How close they stay to the base rate is entirely at the discretion of the lender and there are also various other considerations that come into play in the calculation of the SVR.
When you take out a variable rate mortgage, you pay the lender’s SVR.Tracker Rate
The interest rates on tracker mortgages directly track the BoE base rate, staying a set percentage above it for the whole term of the mortgage.Fixed Rate
When you take out a fixed rate mortgage, the level of interest you pay will remain the same for a set term. This term is usually anywhere from two to five years long, though ten year fixes are making a comeback.
Fixed rate mortgages are seen as relatively secure, allowing you to budget accurately, but you could find yourself losing out depending on how interest rates generally fluctuate during the fixed term.
As well as the interest you pay on your loan, there are a whole host of other costs and fees that can be incurred when you take out a mortgage, including:
- Legal fees (general legal administrative costs to do with setting up the mortgage)
- Valuation fees (accounting for the costs incurred by the lender during the valuation of your property)
- Arrangement fees (essentially a booking or admin fee charged by the lender)
- Redemption fees (the final fee the lender will charge you when you come to pay off your mortgage)
- Early redemption fees (as above, but charged if you happen to pay off your mortgage before the term is finished)
You will not always have to pay all of these fees, for example not all lenders charge for arrangement, but it is worth bearing in mind that there will often be extra costs you might not have been initially aware of when you decided to take out a mortgage.
As a first-time buyer, many lenders will help you get onto the property ladder by offering special deals on their mortgage products, by waiving certain fees for example.
Many providers will offer deal tailored towards graduates or certain public sector employees like teachers.
Those looking to rent out their property can take out specialised buy-to-let mortgages set up specifically for landlords.
These kinds of mortgage are generally interest-only so that the rent the landlord receives can go directly to the lender and then the money gained from the sale of the property can be used to pay off the remaining capital.
Lenders will generally require a large deposit if you want to take out a buy-to-let mortgage. They will also often require you to be receiving more than the mortgage costs (usually around 125%) in rent each month.
Mortgages and Credit Ratings
Both the size of deposit required and the interest rates you are offered (and even whether or not you are offered a mortgage at all) will depend in part on your credit history.
Those with a better credit history will be offered better interest rates, as a general rule.
There are various services available that you can use to check your credit rating. It is advisable to use one of these services before you start applying for mortgages so that you know what kind of deals you can expect.
Having a good credit rating can be particularly important if you’re a first time buyer as many will be refused outright if theirs is not up to scratch.
There are various things you can do to improve your credit rating but generally, keeping up to date with loan or credit card repayments will help you maintain a good credit score.
How to get the Best Deals on Mortgages
Aside from improving your credit score and choosing the most appropriate term and loan value for your financial situation, one of the best ways to guarantee the best deals available is to compare mortgage products online.
Use Money Expert’s mortgage comparison service to see what kind of products you can get. We’ll get you a list of the best available quotes given your requirements, you just pick the one that’s right for you so that you can either get on or move up the property ladder right away.
It’s quick, easy to use and most importantly, totally free.