So, you need a mortgage.
You’ve got your deposit carefully stashed away, and you know how much you need to borrow to secure that ideal home.
Now all you have to do is find the cheapest mortgage for your circumstances.
Unfortunately, it’s not as straightforward as it could be. Fortunately, we can help.
Repayment or interest-only?
Before you start sifting through comparison sites, you need to decide whether you want a repayment or interest-only loan.
Repayment loans cost more each month because you are paying back both the cost of the loan – the interest – and the loan itself.
An interest-only loan is much cheaper because your payments only cover the interest.
The massive health warning is that once the term of your mortgage is over you’ll then have to immediately pay back the loan itself – often hundreds of thousands of pounds – in one go.
If you’re really sure about this, you need to have a clear and realistic way of paying it back and your lender will want to know exactly what that plan is.
For many people, it will involve selling the property the mortgage is secured against. So an interest-only mortgage is only really appropriate for a small number of borrowers.
Fixed rate mortgages
The next big decision is whether a fixed or variable mortgage is best for your circumstances.
A fixed rate mortgage will lock you in to a “fixed” interest rate and therefore a fixed monthly payment for a period of time, often two, three or five years, though 10-year deals or longer are available.
The advantages are pretty clear – you know where you stand and its easy to predict and budget for, especially if you’re on a fixed income.
It’s also the choice many people make when they believe interest rates may rise in the not-so-distant future, which could otherwise end up costing you more if the amount of interest you pay on your mortgage rises in response.
In return for the certainty that your payments will stay the same, you’ll pay slightly more than other, variable, mortgage products and if interest rates fall it could mean you pay over the odds instead.
It’s worth pointing out that the “base” rate of interest, set by the Bank of England to help stabilise the economy, has barely shifted in the past 10 years, rising very slowly from the record low of 0.25 per cent to today’s 0.75 per cent.
Most current predictions don’t include a base rate increase beyond about 1-1.5 per cent before 2023, though this could change, especially given the uncertainty around Brexit and its effect on our economy.
It’s important to know about the Bank of England base rate as a homeowner and mortgage borrower because it is used to determine how much banks charge each other for borrowing and as a result, what interest rate they then charge you for your mortgage.
The sneaky thing about fixed rate mortgages is that once the fixed period is over, the interest rate you pay will immediately revert to the lender’s standard variable rate (SVR) for the rest of the time you have your mortgage with them.
That rate is usually significantly higher than your fixed rate so you need to know exactly when your deal comes to an end and change it quickly to a better offer once it does. Otherwise, your monthly payments could rocket from one month to the next.
(Your finances and credit score need to be in tip top shape when that change-over date approaches so you are eligible for the cheapest deals on the market at that time.)
Cheapest fixed rate mortgage
Right now, if, for example, you’re after a £200,000 loan worth 75 per cent of the property price for 25 years, mortgage broker Trussle reports the best fixed rate deal over two years is from Platform.
The initial interest rate advertised is 1.74 per cent, which means a monthly payment of £822.62 before reverting to the lender’s standard variable interest rate. There’s £50 of fees to pay, and cashback of £250 offered.
Meanwhile, for a three-year fixed rate deal, Accord is offering 1.82 per cent (a monthly payment of £830.29) before reverting to the SVR. Fees of £125 and cashback of £500 also apply.
For a five-year fixed rate, HSBC is offering 1.64 per cent (or £813.13 a month) before the standard rate kicks in. Total fees are £516, but you have to have an HSBC current account to qualify.
If you don’t, Halifax’s five year fix comes in at 1.73 per cent (£821.67 monthly), with £200 of fees.
Or, over 10 years, Trussle found TSB’s 2.29 per cent deal is currently cheapest over the life of the mortgage, at a monthly cost of £876.23, with fees to pay of £995.
Variable rate mortgages
Or you could go for a variable rate mortgage, so named because the interest rate you pay, and therefore your monthly payments can, and usually do vary.
They’re usually a little cheaper than fixed rate deals, including the fees involved, and you may save money if interest rates fall, but they obviously come with some uncertainty over what your payments will be.
And to make matters that little bit more complicated, variable mortgages come in three different flavours.
As the name suggests, these loans track a particular economic indicator, typically the Bank of England’s base rate. So your rate of interest might be 2.5 per cent plus the base rate, for example. Right now, you’d be paying an interest rate of 3.25 per cent.
They’re understandably popular when rates are falling or already low though, as with all variable rates, you risk the impact of a rate rise. And you’re tied into a fixed period too. These are commonly just a couple of years long, but you can plump for the full term, known as a “lifetime” mortgage.
Like any fixed term deal, if you have to bail early you will probably have to pay a hefty early redemption charge or ERC.
Mortgage broker Habito found that on a £200,000 property for 75 per cent of the property value, Nationwide’s two-year tracker at 1.99 per cent (£645.00 a month) currently tops the charts for the most cost-effective deal, coming with £0 of fees and £500 cashback on completion.
SVRs and discount mortgages
Of course the SVR we’ve already mentioned is technically an option, though they’re not offered to new customers that often. They’re usually far more expensive than other types of mortgage borrowing too, and the lender doesn’t need much of a reason to move the rate around. But they offer a certain level of flexibility in that you’re not tied into a deal.
In general though, they’re best left to those with only a small outstanding loan left to pay off, when the fees involved in switching lender may not make it worth it.
Discounted deals, which offer a fairly short-term kind of variable mortgage calculated at a discount to the SVR, are one final option. They’re not well understood and the marketing around them is often criticised as confusing, but the idea is that you pay an interest rate at, say a “2.5 per cent discount” or 2.5 per cent below the lender’s base rate.
If the SVR is currently 5 per cent, you’ll pay 2.5 per cent interest on your loan right now, though, once again the lender can decide to alter the SVR as it sees fit.
Now you’ve narrowed it down a bit more, its time start looking at the hard numbers provided by different lenders.
Dilpreet Bhagrath, mortgage specialist at Trussle warns: “A lot of people will look for the cheapest interest rate when comparing mortgage deals. However, taking the true cost of a mortgage into account is really important. This means you’ll know exactly how much you’ll pay over the initial term, accounting for any fees and incentives associated with the deal, as well as the interest rate of the mortgage.
“Getting a mortgage is one of the biggest financial and emotional commitments someone will make in their lives. So, it’s important to be financially savvy when it comes to securing the most competitive deal.”
First of all, don’t make the mistake of only comparing monthly payments as a successful mortgage application will probably carry with it a number of extra costs, like application and valuation fees. (Remember, these are separate from the fees you pay your solicitor for managing the purchase or sale of the property itself.)
You’ll need to take these into account, as well as any potential cashback deals when you do the final number crunching. Also keep those ERCs in the back of your mind.
You’re already aware of the different kinds of “initial” rates of interest you might pay if, for example, you opted for a five-year fixed-rate deal. But the other number to look out for is the APRC or annual percentage rate of charge.
This is a recent gift from EU lawmakers to anyone trying to work out what a mortgage would cost them over the full term, in a bid to give people clear, consistent figures to compare.
Finally, compare the important monthly repayment figure – the amount you’ll be repaying every month, not including upfront fees or cashback – though of course this will change over the repayment term – the duration of the mortgage.
Overall then, comparison sites like uSwitch.com warn working out how much a mortgage will cost you takes “a little bit of mathematical skill”.
“You need to deduct monthly repayments from the total amount you borrow, then calculate the amount of interest that will be added to the debt each month. This can be calculated by applying a monthly interest rate to your mortgage total.
“Once you know how much interest is being added each month, you simply need to total it up for the number of months in your mortgage.”
Then all you need to do is apply, bearing in mind the offer you receive may differ from the best deals advertised based on your personal circumstances.
Oh, and there’s the small matter of actually buying the property this is all in aid of too.
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