Thanks to the internet, searching and comparing mortgages has never been easier. However, the market is huge with a range of providers, from those with a high street presence to specialist lenders. As a result, it can be challenging to find the right mortgage product for you, whether you’re a first-time buyer or remortgaging to secure a better deal.
So, what areas should you focus on? There are six key factors to keep in mind when you want to take out a mortgage:
1. Type of mortgage
Which type of mortgage is best will depend on your personal situation and goals.
First, do you want an interest-only or repayment mortgage? An interest-only mortgage will be cheaper, but you’ll still owe the amount borrowed at the end of the term. So, you should make plans to build up capital to pay off this amount. A repayment mortgage, on the other hand, means you’re paying both interest and a portion of the sum borrowed.
Next, you should consider how you want your mortgage rate to be calculated. A fixed rate mortgage will mean your repayments are fixed for a defined period of time, usually two, three, five or ten years. This provides security, but you won’t benefit if interest rates fall. Repayments with a variable or tracker mortgage can change and are affected by the wider market. A tracker mortgage will follow the Bank of England base rate, whilst a variable mortgage is linked to your lender’s rate.
2. Loan to value (LTV) ratio
The LTV refers to how much money you want to borrow in comparison to the value of the property. As a general rule, the lower the LTV the more competitive the interest rates available to you.
If you’re remortgaging, it’s important to do some homework here. The first step is to find out exactly how much you still owe on your current mortgage. Next, it’s likely that the value of your home has changed too. As house prices have increased over the last five years, albeit at a slower rate than in the past, your LTV could be lower than expected.
3. Interest rate
Interest rates are often the first thing people look at when searching for a mortgage. It’s easy to see why as it’ll have a direct influence on your monthly repayments but it’s not the only factor to consider. However, it is worthwhile searching providers to find those offering lower interest rates. Even a small difference can save you thousands of pounds of the full term of your mortgage.
How long do you need to pay off your mortgage? Traditionally, the standard term for first-time buyers has been 25 years, but there are now numerous products that allow you to spread payments over 40 years. If you’re remortgaging, you’d usually reduce the term, but there may be some instances where you choose to extend it, for instance, to release capital.
Choosing a longer mortgage term means lower monthly repayments but will result in a higher amount of interest being paid in total. One key factor to keep in mind is retirement, the majority of lenders will have an age that they will want you to have paid off your mortgage by, usually linked to when your working income is likely to stop.
5. Overpayment charges
Overpaying your mortgage means reducing your term and paying less interest. As any overpayment goes towards directly reducing the capital owed, rather than covering interest, even a small amount can have a large impact over the long term. You can either increase monthly payments to consistently overpay or pay off a lump sum.
However, providers may charge you for overpaying above a certain amount. Typically, lenders will allow you to pay an additional 10% of the capital owed without charging you, after this, you may face high fees. If you intend to overpay, be sure to check the potential cost of doing so.
6. Exit fees
It’s important to think about how long you’ll be staying in your home and whether there’s a chance that you’ll need to switch mortgage products sooner than you thought. Exit fees can be hefty and make moving home even more expensive. If you think there’s a chance you’ll want to move before the intended mortgage deal runs out, it may be worth opting for a different product, even if interest rates are higher.
Even if moving isn’t on the cards, it’s always important to check potential fees, you never know when your circumstances or plans might change.
How a professional can help
When you’re looking for a mortgage, you may be tempted to go it alone. However, working with a professional mortgage broker can be valuable. Whilst there will be fees to pay for the service, they can help you identify the best deal for you. There are hundreds of mortgage providers in the UK, many without a high street presence. A mortgage broker can focus your search, streamline the process and hopefully save you money too.
If you’re looking for a new mortgage product and would like our help, please get in touch.