How to get the right mortgage
There’s a lot to think about when buying a new home. Where to buy, your price-range and the number of bedrooms will be on your mind. But before making any of those decisions, it’s a good idea to have either an agreement in principle in place, or at least some idea of the mortgage that's right for you.
A mortgage is typically the largest and most important loan that you will take out, so choosing the right product is essential. Even the smallest percentage difference in rate can add up to a vast amount of extra money over the 20-40 years that a typical mortgage lasts.
Here’s our jargon-free guide to help you get the right mortgage for you.
The importance of a mortgage broker
It is possible to apply for a mortgage without a broker but using one is a good way to help you get the right mortgage for you. A good broker will help you navigate the crowded marketplace and work out which product is best for your specific circumstances.
This has become even more important since the government tightened up mortgage lending rules, meaning that applicants have to provide even more information than before. Every lender will have different requirements but a good broker will understand what is required and be able to help you with the process.
A mortgage broker will help you understand what you can afford – and more importantly, what a lender will accept you can afford. Of course, you don’t have to follow their advice and you can choose your own mortgage without advice if you prefer. This is known as an ‘execution-only' application.
Don’t assume that your bank or building society necessarily has the best mortgage for you; taking advice and finding the right product can save you thousands over the term of the mortgage.
How to choose a broker
A mortgage broker and a mortgage adviser are essentially the same thing and they must be fully qualified, authorised and regulated by the Financial Conduct Authority – check their business cards or letterheads to make sure it states that they are.
You may be offered a mortgage adviser through your bank but they will only be able to advise you on the in-house products available, not the whole of the market. Some brokers will only advise from a select limited panel of lenders, while others will recommend products from across the market. Those that recommend from across the market will give you a wider selection of available products, helping you get the best mortgage for you.
Some brokers will charge you a fee for their services. They may offer a telephone only service, be willing to visit your home, or you may be required to go to their office. Make sure you’re clear in advance how much they will charge and what range of products they can show you.
A few lenders offer mortgages directly to customers, that aren't available via brokers, so even if using an adviser you trust, it can also be a good idea to check the market yourself.
What types of mortgages are there?
There are three standard types of standard mortgage: fixed rate, variable interest rate mortgages, and tracker mortgages.
With a fixed-rate mortgage, your interest rate is fixed for a set period of time, so you get the certainty of knowing how much your repayments will be for that period no matter what happens in the market or to the Bank of England base rate. The typical term for a fixed rate mortgage is 2-5 years, although it’s possible to get them for as long as 10 years. As a general rule, the longer the term you fix for, the higher the interest rate is likely to be as the lender is taking a bigger risk.
A tracker mortgages interest rate moves up and down in line with the base rate, and the Bank of England’s Monetary Policy Committee get together to discuss the base rate every month. If your mortgage variable rate is base rate plus 2%, for example, then it would be 2.5% while base rate is at 0.5%.
Variable rate mortgages
Variable rates are changed by the lenders from time to time in line with market conditions but do not necessarily follow the bank base rate. New borrowers will often get a discount for an initial period e.g if the variable rate is 5%, there could be a 2% discount for the first 2 years, then the rate would revert to the standard variable rate ( SVR). While you would benefit from lower payments if SVRs fall, your payments could also rise if rates go up.
You should be aware that for most fixed or discounted mortgage rates, you willl pay a penalty if you pay off or swap your mortgage during the initial term of the discount. It is often possible to take your mortgage product with you if you move house (known as porting), but if you think this is likely then you should check the conditions of your mortgage carefully with your lender or adviser.