Looking for a mortgage and don’t know where to start? Here’s a list of things to consider when deciding on the right type of mortgage for you.
A mortgage is a type of loan you take out with a bank or building society to purchase property. You’ll need to pay your mortgage back, with interest, over a term agreed with your lender. Since the property acts as security for the debt, if you fail to make repayments it can be repossessed by the lender.
To get a mortgage, you’ll usually need a deposit. The larger your deposit, the less of the property value you’ll need to borrow. Mortgage deals will display the amount you can borrow as a percentage of the property value, which is called the loan-to-value (LTV) ratio. For example:
A mortgage deal offering an LTV of 75% means that the lender will finance 75% of the property value. This means you’d need to provide a 25% deposit or have enough equity in your home to access the lender's rate. The amount of equity you have is how much of the property you own outright, which includes both your initial deposit and any mortgage repayments you’ve made.
To find out how much you could borrow, check out our mortgage calculator.
There are several types of mortgage to consider, but the right one for you will depend on your personal situation as well as wider economic circumstances.
With a fixed rate mortgage, the interest you’re charged will stay the same for a set period, meaning the amount you pay each month won’t change during that time. A typical fixed term runs for somewhere between two and 10 years. After the initial period has passed, the interest you pay will then default to your lender’s Standard Variable Rate (SVR) at which point you may want to consider remortgaging as these rates tend to be higher than a fixed rate mortgage.
A fixed rate mortgage may be appealing if you want to know for certain how much your mortgage repayments will be each month. If there is reason to believe that mortgage rates will rise in the not-so-distant future, you may also be enticed to fix. Be aware, though: if you accept a fixed rate deal and interest rates fall, you could find yourself making above average mortgage repayments.
SVR mortgages are a type of variable rate mortgage where the interest charged can both increase and decrease over time in response to wider economic circumstances. Most mortgage providers will have an SVR, an interest rate it sets internally, which can increase or decrease at any time in response to external factors such as base rate rises. Typically, SVR mortgages charge higher rates than other types of mortgages on the market. However, most won’t impose early repayment charges, which may give you greater flexibility when it comes to paying back your mortgage or switching to a new deal.
If you want a variable rate but your lender’s SVR seems too expensive, it may be worth seeing if they offer a discount mortgage. Also known as a discounted variable mortgage, this type of mortgage moves in tandem with your lender’s SVR, but is set at a certain percentage below this figure. This discounted rate is fixed for an initial period only and after it expires most people will revert to paying the full SVR.
For example, a lender could offer a discount variable rate which is set 1% lower than its SVR. If its SVR stands at 4% at the time you take out your mortgage, this means your discounted variable rate would be 3%. Over the next six months, if your lender were to increase its SVR to 5%, your rate would change to 4%.
Tracker mortgages are a slightly different type of variable mortgage. Unlike an SVR, where lenders decide whether to increase or decrease rates, tracker mortgages are directly influenced by fluctuations in the Bank of England (BoE) base rate. Because of this, you’ll see tracker rates advertised as the bank rate, plus or minus a percentage. Like most variable rates, tracker mortgages can be cost-effective when interest rates are low, but more expensive when interest rates are high.
If you’re taking out a variable mortgage, you may be concerned with how an excessively high interest rate could affect your ability to afford your monthly repayments. In this instance, it is worth seeing if your lender will impose a cap or “ceiling” on your deal. If it does, you’ll also need to look for a “floor” which is the minimum rate you’ll be charged no matter the broader economic trends. You may also see these described as a “cap” and a “collar”.
A guarantor mortgage is a deal that aims to help borrowers with small deposits (or even no deposit), low incomes, and/or little to no credit score get onto the property ladder. This type of mortgage can sometimes be called a family-assisted mortgage, as it works by involving a close family member or trusted friend to act as a guarantor. Guarantors will usually need to be in a stable financial situation themselves, as they’ll be responsible for fulfilling (or guaranteeing) mortgage payments on your behalf should you struggle to make repayments. They’ll also either need to own, or have enough equity in, a property or have enough savings to act as security for the lender.
If you’re looking to buy a property with the intent of renting it out, you usually won’t be able to do this with a residential mortgage. Instead, you’ll need a buy-to-let mortgage, which is a type of loan specifically for landlords. Buy-to-let mortgages tend to come with higher fees and interest rates, and you’ll normally need a deposit of at least 25%. There can also be a bigger list of criteria that you’ll need to meet in order to get a buy-to-let mortgage, including a minimum age, needing to be a homeowner, and having evidence of income separate from rental earnings. Most buy-to-let mortgages are interest-only mortgages, which you may also want to take into consideration.
As a first-time buyer, getting on the housing ladder can seem like a daunting task, but there are options that can help you on your way to becoming a homeowner. Keep an eye out for lenders offering first time buyer mortgage deals, as these usually require smaller deposits, have lower application fees, and are sometimes discounted. Or if you have a family member who is willing to help out, you may want to consider a guarantor mortgage.
Check out our guide on saving for your first home here.
When it comes to paying for your mortgage, there are two different approaches.
With a repayment mortgage, you’ll pay back a portion of the original amount borrowed each month, plus interest. If you meet each monthly repayment, you’ll be guaranteed to pay off your mortgage by the end of its term. This is the most common way a mortgage is repaid.
Interest only mortgages offer a different way of paying back your loan but are typically only available for buy-to-let properties. Instead of making repayments on the original amount borrowed, you’ll be asked to pay off the interest each month. At the end of the mortgage term, you’ll then have to pay back the original loan as a lump sum. While interest-only mortgages tend to have lower monthly repayments, these won’t go towards reducing your debt. By the end of the mortgage term, you’ll need to have either saved or invested enough to pay back your debt in full, or be prepared to sell your property to pay off the original borrowed capital.
While interest rates and LTV ratios are important to consider, there are other factors that may help in deciding what mortgage is right for you.
For instance, you may want to give some thought to your mortgage’s length of term, which is how long it’ll take to pay off your debt providing you meet the monthly repayments. A typical length of term falls somewhere between 25 and 35 years, though it can be possible to get a shorter term if you can afford to make the repayments and/or you’re nearing retirement age. While monthly repayments will usually be cheaper the longer the term, your mortgage can end up being more expensive in the long run as you’ll be charged more in interest. On the other hand, with a shorter term you’ll pay less in interest overall and own your property sooner, but your monthly repayments will be higher.
When it comes to cost, it’s not just monthly repayments you need to think about. All mortgages come with additional fees, such as product and valuation fees. Some can apply charges for making early repayments or when switching to a different lender. To make sure you’re getting a good deal, you’ll want to factor in all costs.
Some mortgage deals will offer incentives to try to entice borrowers, which can include a free valuation, free legal fees and cashback. While most won’t choose a mortgage based on incentives alone, they can sometimes sweeten the deal.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.