What Should You Look for When Shopping for a Mortgage?

What Should You Look for When Shopping for a Mortgage?

April 28, 2017

What Should You Look for When Shopping for a Mortgage?

When it comes to buying a home, the biggest problem most buyers have is deciding what kind of mortgage is the best for them. This might sound like a relatively straightforward decision to make, but with each lender offering a dazzling menu of dozens of different options, it can be difficult to pick the right path. We know how important it is that buyers have finances they can trust, and how vital it is to find a mortgage that is affordable, and in this guide we’ll discuss what the different mortgage options mean for you as a borrower.

Interest Rates:

The biggest expense associated with your mortgage is the interest rate you pay on it. As a rule of thumb, the more deposit you can put down the lower your interest rate will be, so it’s worth saving as much as possible to put into the pot. Obviously you’ll want a lower interest rate, but there are certain other aspects of a mortgage which should be considered as well; the best mortgage deal is not always the one with the lowest interest rate.

Fees:

Many mortgage providers are now offering “fee-free” mortgages. Typically what this means is that the arrangement fee is reclaimed through a higher interest rate on the loan; not a huge amount higher, but it usually works out to cost more in the long run than if the fees were paid up front. Saving a thousand pounds or so when you’re buying a house can be extremely useful, and can give you a little more flexibility where you really need it, so adding these fees to the mortgage can make sense (you can always remortgage later). However, if you don’t need the extra money right away, it could be a good idea to pay the fees initially instead.

Early Repayment Charges:

The mortgage market is highly competitive, and borrowers are becoming increasingly savvy about shopping around for a better deal. With mortgage switch times growing shorter and shorter, it’s becoming ever easier for borrowers to remortgage to take advantage of a better offer. However, repaying a mortgage early often attracts an early repayment charge (or ERC), which can make it costly to leave a mortgage deal.

As well as remortgaging, many homeowners make “overpayments” during the course of their mortgage. This is a great way to save of interest charges, as it reduces the outstanding loan capital, but it can also attracts ERCs. A mortgage which permits early repayments without charges (or with minimal charges) is valuable, as it allows borrowers more flexibility to remortgage further on down the line, but these favourable terms are often only available with larger deposits.

Loan Term:

The length of a loan determines its overall cost; because interest is charged annually, the longer a loan is repaid for the more expensive it is. However, spreading the cost of a mortgage over a greater length of time can also make it more affordable: although a 30-year mortgage at £900 per month might cost more overall than a 25-year mortgage at £1,000 per month, the lower monthly bill on the longer mortgage might make all the difference to a borrower on a budget.

Bear in mind that a longer mortgage term will also take longer to build up equity, so if you’re planning to remortgage after a few years you won’t be able to get quite as good a deal (if you can avoid ERCs on a long mortgage, you’ll have some flexibility to make overpayments and build up extra equity).

Initial “Honeymoon” Period:

Most mortgage now come with an introductory period which features favourable terms – usually a more stable interest rate. The most common of these are fixed and tracker rates: a fixed interest rate remains the same, whilst a tracker directly follows the Bank of England’s base rate. In both cases, borrowers have a greater degree of stability, which can be invaluable to homeowners with a tight budget. Borrowers will usually find that lenders will offer a longer honeymoon period in exchange for a less favourable rate; a 2-year fixed rate of 4.5% might rise to 5.5% over 5 years.

In almost all cases, the terms become more favourable as the size of your deposit increases; if you’re not sure of what’s best for you, do everything you can to build that deposit up as high as possible – this will allow you to access more favourable terms and rates from the lender.