Beginner's Guide To: Mortgages

It's been very difficult to get a mortgage recently unless you've had a deposit of at least 25 per cent. But there are indications that the situation may be improving. Not only are the leading mortgage rates at historic lows, but some providers are also relaxing lending criteria. However, the mortgage market is extremely complex, so here are the basics.

Fixed or variable?

Fixed rate mortgages offer peace of mind as you know exactly what your repayments will be for a set period of time – the most popular terms are two and five years.

You can fix for longer though, although an early redemption charge (ERC) will usually apply.

Fixed rates are hugely popular at the moment. The Bank of England isn't expected to cut base rate any further, so many borrowers are fixing in the hope they are locking in at the bottom of the market.

Another option is a variable rate. The rates on these products are either linked to the lender's standard variable rate (known as discounts) or the base rate (known as trackers). If you go for a variable mortgage, your monthly payments can go up or down.

As with fixed rates, many variable mortgages have introductory periods and you will be charged an ERC if you want to get out of the deal during that time. For maximum flexibility, lifetime trackers are often penalty-free.

Loan to value (LTV)

This refers to the maximum you can borrow as a proportion of the property's value – what deposit the lender will require. If the LTV is 75 per cent, the maximum you can borrow is 75 per cent of the property's value, so you'll need a deposit of at least 25 per cent.

Fees

You must factor in the impact of fees when comparing mortgages – don't just go for the lowest headline rate. It may work out cheaper to opt for a product with a higher rate if the fees on that deal are lower. There will also be legal and valuation costs.

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