Essential things you need to know when choosing a mortgage
It can be incredibly difficult to choose the right mortgage to suit your needs. From the basics of the loan, to the technical details involved in the process, to the provider, there’s a lot to get straight when you look at how to choose a mortgage.
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1. What is LTV?
Mortgages come in different shapes and sizes. The monthly rate you pay will usually be governed by how much you borrow and the value of the property itself. This is known as the loan-to-value, or LTV.
A deposit of 10 per cent of the property’s purchase price is quite typical for first-time buyers. In this case, the mortgage would then constitute the remaining 90 per cent, so this would be classified as a 90 per cent loan-to-value mortgage.
If you can put down a higher deposit, and thus reduce your LTV, you will in many cases find that you’ll be able to access better interest rates from mortgage providers.
2. What mortgage types are available?
At the start of your loan repayment plan, you may be offered a deal or fixed interest rate for the first two to five years. During this time you will pay a predefined interest rate so you can budget for repayments with this in mind. When the deal ends, you will move to the lenders standard variable rate unless you seek a new deal.
Standard variable rate
This means that the interest you pay on your loan will vary depending on your lender’s decision to raise or lower it.
This rate will usually follow the base rate of the Bank of England with an added percentage – although the lender has no obligation to strictly follow this rate.
Tracker rate mortgages vary depending on the Bank of England’s base rate. As this changes, so too will your mortgage interest rate. There will usually be a 1-2 per cent increase on this base rate as it tracks the ups and downs on the base rate.
3. How do mortgage repayments work?
There are two ways to repay your mortgage:
- Standard repayment
- Interest only repayment
With a standard repayment mortgage, you will pay back a part of the loan each month in addition to the interest on the total amount. Your loan will be paid off once you have paid back the total amount on the loan. The amount paid in interest will reduce each month.
With an interest-only mortgage, your monthly payments will just go towards servicing the interest on the loan, so the amount outstanding will not decrease. At the end of the term you will then still owe the original amount of the loan value.
- Gather all the paperwork you need (pay slips, bank statements etc.)
- Create a realistic payment schedule
- Find out what your credit rating is
- Consider paying off debt and selling assets
- Research the market thoroughly
4. How to find a good rate
Mortgage rates are influenced by variables that are often outside of your control. Keep this in mind when you’re thinking about your finances and look long term, considering how the economy or your lender will impact the way your interest rate and repayments might change.
The Bank of England base rate influences mortgage interest rates, but so do the internal policies and strategies of individual banks and building societies.
In the end, it is a market like any other and you should be careful when borrowing money for your property.
Sometimes the security of a fixed rate is the best course of action while for others it could be more beneficial to risk it with a tracker rate to take advantage of lower interest rates.
5. What are mortgage fees and charges?
Lenders also increase their revenue with mortgage fees so don’t forget to factor in how much these fees will add to your overall repayments and don’t be fooled by an attractively low interest rate until you review all terms and conditions and the total cost of borrowing.
You must also watch out for any charges at the end of the mortgage. You could be charged for an early repayment of your mortgage or an exit fee. Check the details with any potential lenders and keep asking questions until you’re satisfied you have a clear understanding of all costs associated with the loan.
6. How to find a lender
The act of choosing a mortgage that will have such a long-term impact on your life can seem daunting. Seeking professional advice, performing research and inquiring with friends and family who have mortgages is highly recommended.
It’s not all about simply finding the lowest interest rates. It’s about finding an arrangement that will suit you, your lifestyle, your income and your family in the years to come.
Many people now seek help from brokers to navigate the mortgage landscapes for them and walk them through the whole process.
Whatever you do, take a long term view of the process and try to learn as much as you can about the market before jumping in.
Jim brings together unique data insights, contextual knowledge and thought provoking themes, to shed new light on important issues affecting both UK businesses and individuals. Read more