How to get the right mortgage

Category: Mortgages
Date: 6/1/2008

Getting a mortgage is the biggest financial commitment most of us will ever make, and one of the biggest potential areas to save money.

These top tips will arm you with a good basic understanding of how mortgages work and what sort of deals are available, which will help make sure you get the right mortgage to suit your needs.

1. Repayment or interest-only? It's important to consider how you'll repay the mortgage and to understand whether a repayment or interest-only mortgage is right for you. A repayment mortgage means that your monthly mortgage repayments go to repay both the capital borrowed and the interest charged, meaning you'll have paid off the mortgage by the end of the term.
   
   With an interest-only mortgage, your monthly mortgage repayments only pay the interest charged on the capital borrowed, meaning that you'll still owe the amount you borrowed at the end of the term, unless you take out a separate repayment vehicle, such as an endowment policy or an ISA. Interest-only mortgages can appear to be cheaper in terms of the monthly repayment amount, but you must factor in the additional monthly cost of your repayment vehicle.
   
   Interest-only mortgages can be more tax efficient if you're using an ISA based investment as your repayment vehicle. It's important that you understand the risks involved as the value of your repayment vehicle could end up being lower than the capital you borrowed. Read our guide to mortgages for more information.
   
   
2. Fixed or variable interest rate? With a fixed rate mortgage your monthly payments are fixed for a set period of time, usually between 2 and 5 years. Fixed rate mortgages are good if you want the security of knowing what your monthly payments will be for a set period of time, especially during uncertain economic times or in a climate when interest rates are rising. You do have to pay for this privilege though, as upfront fees and early redemption charges are common with fixed rate mortgages. Take a look at our current best buy fixed rate mortgages to compare the latest deals on offer.
   
   With variable rate mortgages you pay the mortgage lenders' standard variable rate or a rate that is linked to Bank of England base rate, so your payments can go up or down in line with market conditions. For some variable rate mortgages, the fees charged aren't as high as for fixed rate mortgages. Variable rate mortgages are good if you don't need the security of knowing what your monthly repayments will be and during a climate where interest rates are declining. Take a look at our current best buy variable rate mortgages to compare the latest deals on offer.
   
   
3. What about a discounted variable rate? With a discounted variable rate mortgage the mortgage lender gives you a discount off the variable rate for a set period of time, usually of between 2 to 5 years. Your monthly repayments can still go up or down in line with the market, but you can benefit from any decline in mortgage rates, which you wouldn't be able to with a fixed rate mortgage. Discounted variable rate mortgages are cheaper than variable rate mortgages, but do charge arrangement fees. Take a look at the current best buy discounted variable rate mortgages to compare the latest deals on offer.
   
   
4. What's a tracker mortgage? Tracker mortgages are variable rate mortgages that are linked to either the Bank of England base rate or the LIBOR rate. As with variable rate mortgages your monthly mortgage payment can go up or down in line with market conditions. With a tracker mortgage you are guaranteed to benefit from any interest rate reductions (albeit after a certain time) which you are not with a variable rate or discounted variable rate mortgage.
   
   
5. What are flexible or lifestyle mortgages? Flexible or lifestyle mortgages are really features on a fixed or variable mortgage that let you make extra payments or take payment holidays. Making extra payments on your mortgage can save you money by reducing the overall amount of interest you'll pay, but your money will be tied up in your property, meaning you won't be able to access it quickly in the event that you need to. Payment holidays offer great flexibility (e.g. you don't want to pay the mortgage for a couple of months due to the arrival of a new baby), but you still incur interest thus increasing the total amount you have to pay back. Some mortgages only let you take payment holidays if you've made previous overpayments or after making a set number of repayments.
   
   
6. What about current account or offset mortgages? Current account and offset mortgages are fixed or variable rate mortgages that are linked to your current account and/or savings account. They work on the basis that the money in your current account and/or savings account is used to offset the interest paid on the mortgage debt. For example, if you had a mortgage of £100,000 and savings of £20,000, the interest you would be charged on your mortgage would be on £80,000. You don't get paid any interest on the money in your current account or savings account, but these types of mortgages can be good for people paying the higher rate of tax on their savings. You can also access your savings more easily than if you had made extra payments on your mortgage. It's important that you compare the mortgage rates and fees (or 'true cost') for current account and offset mortgages against other types of mortgages to make sure that any benefit in paying less interest isn't eroded because you're paying a higher interest rate than you could have got with a fixed rate mortgage for example.
   
   
7. Can I get cashback? Cashback mortgages offer a lump sum when the mortgage is taken out, which can come in handy when paying all the costs of moving home. Cashback mortgages usually have a lock-in period where you'll be charged an early redemption penalty if you re-mortgage to another lender before the end of the lock-in period. It's also important to compare the rates and charges against other mortgages so that you know what the overall or 'true' cost of the mortgage is.
   
   
8. Compare the 'true cost' of your mortgage. Don't just compare different mortgage deals based on the interest rate or monthly repayment amount. It's important to compare all fees as these can easily wipe out any benefits of a lower interest rate. It's important to compare all fees such as arrangement fees, early redemption penalties, higher lending charges, as well as any freebies such as free valuation or legal fees. Read our guide to mortgages or glossary of terms for a more detailed explanation of mortgage fees.
   
   
9. Use a financial price comparison site that's 'whole of market'. It's always a good idea to use a financial price comparison site to compare all the different mortgage deals before you speak to a mortgage lender or broker. However, make sure that you use a comparison site that's 'whole of market', meaning they let you compare all mortgage products on the market, not just the ones that they earn commission from. Moneyfacts.co.uk is one of the few financial comparison sites that include all products, not just the ones that pay us commission, and our best buys for mortgages are a good place to start to arm yourself with a good understanding of the latest deals on offer to help you make informed decisions.
   
   
10. Don't be scared to use a mortgage broker. Mortgage brokers can help get the right mortgage to suit your needs and sometimes have access to 'exclusive' deals that you can't get elsewhere. But, if you use a broker it's good to go armed with a good understanding of the latest deals, and make sure that you choose a broker that's 'whole of market' and not just restricted to a small panel of lenders.
    
    If you use a broker, think about whether you want to pay them a fee for their service (which is usually no more than £400, payable on completion) or whether you're happy for them to take commission from the lender instead, which us usually between 0.25% - 0.50% of the mortgage value. If the broker is whole of market then they must give you the best advice and not just recommend mortgages where they receive the highest commission.