Arranging a mortgage is not straightforward. Not only is it harder convincing lenders to part with their money these days, but you also have to be on your guard against an array of questionable charges that can be found buried away in the small print.
Whether you are a first-time buyer or planning to remortgage, you need to accept that, even in the very best scenarios, the process may drag on for a number of weeks and leave you feeling drained of life and seriously out of pocket.
You will also face the choice of navigating your own way through piles of information concerning rates, fees and various conditions, or handing over responsibility to a specialist mortgage broker in the hope of a better deal. So where should you start – and what do you need to know?
The mortgage market
Let's start with the mortgage market itself. The situation has certainly improved over the past few months but we are still way off the heady days of 2007, according to David Hollingworth, head of communications at London & Country Mortgages.
"There is still quite limited availability of funding but although the amount of deposit you can raise is crucial, the deals are generally getting better," he says. "There are even deals for LTV values of up to 90 per cent which is an encouraging sign."
Gross mortgage lending was an estimated £11.3bn in March, which represented a 21 per cent increase on the £9.3bn of the previous month but a two per cent decline on the £11.5bn recorded in March 2010, according to data published by the Council of Mortgage Lenders.
Bob Pannell, chief economist at the CML, attributes the fall in demand for house purchase loans since the start of the year to the fact that household finances are under a lot of pressure, but says demand for remortgaging remains firm. "Remortgage approvals in February were the highest for more than two years and stronger remortgage activity looks set to continue propping up overall lending," he adds.
Interest-only or capital & interest?
What kind of product do you want? How much do you need to borrow? Can you raise a decent deposit? Over what term do you want the mortgage? Arguably the most important decision is choosing between the two main types of mortgage: interest-only and capital and interest.
Interest-only mortgages – as the name suggests – means repayments will only cover the interest being charged on the "loan" taken out. The actual sum borrowed remains the same and a separate investment vehicle has to be built up to pay it off.
In contrast, capital and interest mortgages mean higher monthly repayments, but at least you're paying off the overall debt as well. Every time a payment goes out of your account you will know you are reducing the entire amount owed.
Until the 1980s, most mortgages were capital and interest products, but this reversed over the following decade. Borrowers are now split between the two sides and a decision on what's best for you will depend on your personal circumstances.
fixed or tracker?
Fixed mortgages can make sense for first-time buyers and those who like to know exactly how much they will be paying out each month so they can budget accordingly. It also protects them against future rises.
Rates on trackers are often more attractive than fixed-rate products because you're agreeing to take on a higher degree of uncertainty. They suit those who believe interest rates are likely to go down in the future, as well as those who are no longer restricted by tight budgets.
There are pros and cons with each approach. If interest rates fall after you've taken the mortgage out you'd have been financially better off on a tracker. If they rise, meanwhile, you could end up paying out substantially more each month.
So which makes sense in the current environment? Ray Boulger, senior technical manager at John Charcol, believes we may not see rate rises in the UK until next year which means tracker products look more attractive.
However, fixed-rate products shouldn't be totally ignored, points out Mr Hollingworth at London & Country Mortgages. "Borrowers must remain focused on their own position and what they feel suits them best," he explains. "A proportion of people will always go for that peace of mind."
Such individuals should even consider longer-term fixed rate deals – in the three to five-year spectrum, he suggests. "This might give them a bit more security over a longer period rather than being locked into something for the short-term during which time the Bank of England base rate looks likely to remain pretty low."
fees and charges
Always be on your guard against fees. Lenders may be offering attractive headline rates but they're also coming up with increasingly innovative ways to claw their money back so you need to analyse exactly how much the mortgage will cost before making a final decision.
A significant expense is arrangement fees. The cheapest is around £500, but it's not uncommon to be charged £2,500 for an attractive rate.Reuse content