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How to get the right mortgage

Whether it’s your first home or the next rung on the property ladder, one of the most important things you'll need to consider is the type of mortgage that's right for you. Our jargon-free guide helps you understand the key things you'll need to consider.

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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.

Mortgage

The importance of a mortgage broker

Mortgage Application

Mortgage Application

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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.

Fixed-rate 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.

Tracker mortgages

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.

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Choosing your mortgage term

Borrow Money

If you do decide to choose a fixed rate mortgage then you need to decide how long to fix for. You can fix for a short period e.g. 2 years. However, if you want security over a longer period then you’ll likely pay a higher interest rate.

No one has a crystal ball and your mortgage broker may advise you on length but he or she can’t make that decision for you. If you are worried about whether you can afford your mortgage then fixing for longer can give you some security, but at a cost. Rates have been low for several years now but eventually they will inevitably rise, so it’s important to factor that into your thinking.

Finding the best interest rate

Once you know what type of mortgage you want and for how long, you can start looking at the rates being offered. If you look at the best buy tables in newspapers or via comparison websites then you’ll see the cheapest rates available, but to really understand what is available to you and your personal circumstances you should seek the advice of a specialist broker you can analyse the market and your suitability.

The rates you’re offered will depend on how much of a deposit you have; the very best rates usually require a deposit or equity of at least 25% and often 40%. However, there are some lenders who will offer competitive rates for buyers with just 5% saved or even buyers needing a 100% mortgage.

One very important consideration is the overall cost of the mortgage and not just the interest rate. For example, a product might appear at the top of the best buy charts with a fantastically low interest rate but a very high application fee. Over the period of the mortgage, that fee could make the loan more expensive than a mortgage with a higher interest rate but a lower fee.

It’s really important to look at how much your mortgage will cost you over the term, so that you know if it really is a best buy for you or not.

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Take advantage of Help to Buy

Borrow Money

If you are finding it difficult to obtain a mortgage, then it could be worth considering the government’s Help To Buy Equity Loan scheme.

With Help to Buy Equity Loan, you only need a minimum deposit of 5% of the value of your new home. The government lends you an equity loan of up to 20% of the value of your home (15% in Scotland, 40% in London), so you’ll only need a 75% mortgage (80% in Scotland, 55% in London). This gives you access to better mortgage rates, and the equity loan is interest-free for 5 years too.

Mortgages for special circumstances

There are now mortgages available to homebuyers who have been self-employed for just 12 months, when previously lenders often needed 3 years of accounts history. Likewise, home buyers who have missed payments on loans or credit cards, or who are purchasing later in life and need a mortgage that takes them past normal retirement age might now be eligible. So even if you have ‘special’ circumstances, it is still worthwhile talking to an expert who can advise you of your options. 

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