Mortgage repayments are likely to be the most significant monthly expense homeowners make each month, which makes it vital for consumers to ensure that they get the best mortgage deal for their circumstances.
With base rate at its lowest point in history, right now the mortgage market is highly competitive, with low rates available across the mortgage charts. But, while rate is important when choosing a deal, there is a lot more that needs to be factored into the decision-making process.
Below are some key factors to consider when deciding on a new mortgage deal.
In the past, variable rate mortgages were attractive options as they tended to offer lower rates than fixed rate deals, but in recent years this is not always the case. As well as this, variable rate mortgages come with the risk of being unexpectedly increased (or decreased) at very little notice. This means that for those on a tight monthly budget, a variable rate mortgage might not be ideal as they may struggle to make repayments if the rate increases. The alternative option is a fixed rate deal, which ensures that the rate does not change for a specific term. Once a fixed term ends, borrowers will be put on the lender’s standard variable rate (SVR), which can be significantly higher than the fixed term rate. Typically, borrowers can start to look for a new deal at about two or three months prior to their current deal ending, but those looking to do this should be careful about early repayment charges (ERC). A fixed term deal has the advantage of borrowers knowing exactly how much they will be paying in monthly mortgage repayments.
When looking at deals, both variable and fixed, using our mortgage repayment calculator will enable borrowers to see exactly how much they will be making in monthly repayments with the rate being offered.
Two year fixed rate deals have traditionally offered lower rates than five year fixed deals, but competition within the mortgage market has intensified in recent years the gap has narrowed. Saying this, two year fixed deals do still tend to offer lower rates than five year fixed mortgages. Not only do two year fixed rate mortgages offer lower rates, but are also a good option for those who are unsure if they will remain in the property in the long-term as they are only tied into a two year deal.
While in the past most homeowners opted for two year deals, in recent years an increasing number of borrowers have been opting for long-term mortgages and there are now 10 and 15 year fixed rate deals available. The most popular type of long-term fixed rate mortgage is still five year fixed rate deals. Locking into a five year deal at a low rate has the advantage of mortgage repayments remaining low if interest rates rise, as well as providing stability during times of economic uncertainty.
Once a borrower knows what type of deal they want, they then need to consider the rate. Choosing a low rate is important as this will impact the affordability of the mortgage and how much that will need to be paid each month in repayments. Saying this, the rate should not be the sole consideration as paying a slightly higher rate could be considered if additional features of the deal are beneficial.
Right now, with base rate at a historic low, mortgage rates are competitively low, which gives borrowers a wide range of options when choosing the best mortgage rate.
Flexible features are the flexibility lenders will offer with the mortgage deal. Both variable and fixed rate deals can offer flexible features. The type of flexible features that can be offered include the ability to make underpayments, make overpayments, take payment holidays, whether draw down can be taken and if a lump sum is allowed to be taken. Often, the most common types of flexible features that are allowed are the ability to make overpayments and payment holidays. Borrowers should be aware that additional terms and conditions can often be included with flexible features, so it is vital they understand what these are before the mortgage deal is taken out.
Not all mortgage deals will offer incentives, but for many lenders, especially those not offering the lowest rates, it can help make the deal more attractive to borrowers. Incentives can include a range of benefits, from free valuation to cashback, and often help to make the cost of taking out the new mortgage deal cheaper.
Along with taking into consideration of the above factors, the right mortgage deal will also depend on the borrower’s attitude to risk, future plans and looking at the true rate of the deal, which is created by combining the rate, the fee, flexible features and incentives. For borrowers who would like further advice or guidance on choosing the right mortgage deal, speaking to a mortgage broker is a good option as they will be able to highlight deals that factor in these additional considerations. In addition to this, as a mortgage is likely to the biggest debt a consumer takes out in their lifetime, they may want to speak to an independent financial adviser to discuss their options. As Eleanor Williams, finance expert at Moneyfacts.co.uk, explained: “Borrowers who are looking into their mortgage options now that the property market has reopened, may do well to speak with an independent, qualified financial adviser in order to ensure they can access up to date and accurate information as to what is available. Lenders are updating their products, criteria and lending requirements regularly at the moment. Speaking to someone qualified can help ensure borrowers select the right deal for their individual circumstances and affordability, and that will fit around their future plans.”
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