Choosing a mortgage
Last updated on 09 June 2016
With hundreds of mortgages available, it's easy to be overwhelmed by the choice. But before you look at specific deals, first decide how you want to repay your mortgage.
There are two main ways of repaying a mortgage. You can take out a repayment mortgage where each month you pay the interest on your loan and you repay some of the capital you borrowed. At the end of the term you'll have paid off the whole of the loan. This is the safest type of mortgage.
Or you can opt for an interest-only mortgage where your repayments cover the interest on your loan but nothing else. However, lenders usually won't lend on an interest-only basis these days unless you can show you have a way of paying back the amount you originally borrowed when the mortgage ends. The main way of doing this is by paying into an investment which hopefully will grow sufficiently to pay off the capital when your mortgage comes to an end.
Investments used for this purpose include endowment policies, stocks and shares ISAs and pensions. But there's no guarantee your investments will grow sufficiently to repay your mortgage loan as thousands of endowment policyholders have found out to their cost. So this is a higher-risk strategy.
Next decide if you want a fixed or variable-rate deal. With a fixed rate the interest stays the same for the term of the deal. If you're on a tight budget or want to know exactly what your repayments will be each month, it's worth considering a fixed-rate mortgage.
With a variable-rate mortgage your repayments can go up and down depending on interest rates. If you think interest rates might fall and therefore your mortgage rate too, you might prefer this option.
There are different types of variable-rate deals including standard variable rate (SVR), discount rate and tracker deals.
Capped-rate mortgages are a cross between a fixed-rate and variable-rate mortgage. Your repayments can to up and down as interest rates fluctuate but they cannot go above a certain limit. These types of mortgages come and go from the market and aren't always available.
If your income is irregular, you have lots of savings or you move large sums in and out of your current account, you might want to look at offset mortgages. These are mortgages linked to a savings and/or current account. Any money in these accounts is offset against your mortgage debt when the interest on your loan is worked out each month.
For example, if your mortgage is £150,000 and you have £25,000 in your savings/current account, this is offset against your mortgage so you only pay interest on £125,000 (£150,000 - £25,000).
Self-employed people who keep their tax money handy in a savings account might find this a good option as might people who receive large bonuses from work.
Many lenders offer flexible features on their mortgages. These include allowing borrowers to make overpayments, underpayments and capital repayments with no penalties. Payment holidays for those who have overpaid in the past are also often available.
You can find out about mortgage deals by visiting lenders, looking on the internet or using an independent mortgage adviser if you want extra help, something unusual or have a troubled credit history.
It's important to look at all the costs associated with a mortgage. Many have arrangement fees as well as hefty penalties if you leave the deal early. To compare the cost of deals which last for the same period, add together all the fees plus mortgage payments for the length of the deal and compare these figures.
Tightening up of the lending rules
New mortgage rules were introduced in April 2014 to ensure borrowers are only granted mortgages they can afford to repay. The new rules, known as the Mortgage Market Review, mean that lenders now carry out more stringent tests when assessing if and how much they will lend homebuyers. This has resulted in the mortgage application process not only taking longer but in some cases people not being able to borrow as much as they would have been able to in the past.