What to consider before applying for a mortgage
When repayments typically span 25-30 years, it's no wonder that mortgages are often described as the biggest financial commitment of a person's life. Add in the range of mortgage products on the market and the whole thing can feel overwhelming.
The good news is that millions of people have successfully secured mortgages in the past, so if you've ever dreamed of that moment when, for the first time, you put the key in the door and step into your own home, there's really no reason that dream can't become a bricks-and-mortar reality.
With the right preparation, those keys may soon be in your hand. Here's what you need to know...
Where can you get a mortgage from?
The vast majority of high-street banks and building societies offer mortgage lending schemes, as do specialist lenders.
You may find it useful talking to a mortgage broker first. They'll explain your options and try to help you find the best deal available to you. There's no obligation to commit to their recommendation, so it can be a good starting point - just make sure you check that their research covers the whole market.
But these days the most effective mortgage broker may be your smartphone - free mortgage broking apps use powerful algorithms to find the most suitable deal for your circumstances. Now you can check out a whole range of mortgage options in a matter of minutes.
What do you need to do before you start?
- Put your affairs in order. The better your credit rating, the more options you're likely to have when looking for a mortgage. So make sure your credit report is accurate, up to date, and in the best shape possible.
- Work out your budget. Will you actually be able to meet your mortgage repayments. Comparison websites can give you a good indication of how much the repayments on different mortgages will be at the outset.
- Think of the future. You need to establish whether you'll be able to pay the mortgage in the years ahead. Interest rates on mortgages can vary over time, changing your monthly repayments. And what would happen if your personal circumstances changed?
- Put together the largest deposit you can. Your deposit could be the biggest single factor in dictating your mortgage rate. Generally speaking, the larger your deposit, the better the deal you will likely be able to secure.
- Beware the extra costs. As well as the deposit, there are all the associated costs as well, from solicitor's and surveyor's fees to stamp duty. Make sure these are covered.
What should you look for in a mortgage?
- The term of the mortgage. Most mortgages last for 25 years, but you can choose a longer or shorter period, depending on what you can afford and how quickly you want to clear your debts.
- How you repay. With a repayment mortgage you make monthly payments covering both the interest and a percentage of the loan until it's all cleared. With an interest-only mortgage you only have to pay off the interest, for an agreed period. You then have to pay off the mortgage in full at the end of the term.
- The type of mortgage. There are different types of mortgage available – some of the most common ones are:
- Fixed-rate. A fixed-rate mortgage stays at a set rate for a pre determined period – 2% for three years, for instance. They bring security because you know what your repayments will be for the set period, but they generally revert to a higher rate once that period is over.
- Variable rate. There are two types of variable-rate mortgage: trackers and standard variable rates (SVR). Tracker mortgages rise and fall in line with another interest rate, usually the Bank of England’s benchmark interest rate (plus a few per cent). If the rate is cut, your repayments may fall, however if the rate rises, your repayments can go up. SVRs are set by lenders and can change independently of the base rate.
- Discount. A discount mortgage generally offers a certain percentage off the lenders SVR for a set period of time. So, for instance, 2% off the SVR of 4.9% for five years.
- The interest rate. When you are looking for a new mortgage, you will likely see two figures: the initial rate and the APRC. The initial rate is generally the 'offer' – say 2% fixed for three years, after which you revert to the SVR (as above). The APRC (annual percentage rate of charge) is the rate you would pay if you kept this mortgage for its full term and includes the initial rate, the SVR after that, and any charges and fees such as valuation charges. Both the initial rate and the APRC will help determine the size of your monthly repayments.
- The LTV (loan-to-value) ratio. This is the maximum amount that your mortgage provider will lend you as a percentage of the value of the property. Say you are buying a new home worth £200,000 and the LTV is 80%, the most you will be able to borrow is £160,000, meaning you will need to find a £40,000 deposit. Mortgages with lower LTVs often come with good deals as the lender is taking less risk.
Most people looking for a new mortgage are going to search for the best deal possible for them – and with a large number of lenders in the market, it's vital that you do your research. Look for special initial rates – fixed or variable – over a set period. Check whether you can make overpayments and whether there are penalties if you switch to another mortgage. And watch out for fees. It's easy to get attracted by a cheap initial rate, but they might work out more expensive in the long run, so do your homework.