Taking out a mortgage is one of the biggest financial transactions you’re likely to make, so it’s worth getting it right.
When it comes to arranging a mortgage, you’ll find that there are hundreds of options to pick from – which can make it a daunting task. However, taking out a mortgage is one of the biggest financial transactions you’re likely to make, so it’s worth getting it right. Here are some tips on how to choose the right mortgage for you.
Do your research First things first, it’s a good idea to have a firm understanding of the different types of mortgages that are available. With that information, you can then choose something that’s right for your circumstances.
Fixed-rate mortgages: These charge a set rate of interest for a predetermined period (usually two, three or five years), before moving onto a variable rate. You usually cannot change the deal during the period of the fixed term – and once it is over you may well want to renegotiate.
Tracker mortgages: These charge a variable level, usually at a fixed percent above the Bank of England base rate. In some cases, the bank's rate will last the lifetime of the mortgage (though interest rates will of course still go up and down). In other cases, the deal may last for several years, after which you will want to remortgage.
Discount mortgages: Standard Variable Rate mortgages are similar to tracker mortgages – but the rate is solely determined by the bank, rather than being tied to interest rates. Many lenders hence offer an introductory ‘Discount Mortgage’ to an SVR, in order to make it more attractive. This can be an affordable option, but that is likely to change when the SVR rate kicks in (and costs rise sharply). Once you have that nailed down, you’ll want to begin shopping around and looking for the best offers out there. Keep in mind, of course, that fees should be factored into the costs of the mortgage – so something that might superficially seem like a bargain may not be at all.
What does it mean for the future? First and foremost, your mortgage will need to cover the property that you want to buy – and you should choose something that you will be able to pay without struggling. You’ll be locked into a financial arrangement for quite some time, after all, and if you select a mortgage that pushes you to the limit then even a short-term strain on finances could put you at risk of default. What’s more, if your circumstances permanently change (for example, if you lost your job), then it’s worth considering how you would adjust your circumstances. Equally, if interest rates go up and you have a variable rate mortgage, consider how it will affect the amount that you have to pay each month. Some mortgages will also allow you to underpay for periods or to take a mortgage holiday – which may come in useful depending on how your finances go up and down. There may well also be limits on how much you can increase your payments by should you be able to afford to – so you’re likely to have a financial commitment for the long term, whatever happens.
What happens after your initial deal ends? After the initial period of your mortgage deal ends, you may well be automatically moved to different terms. Keep this in mind before signing, and look into what changes you’re allowed to make and whether making changes incurs fees (both before and after the mortgage’s initial term).
What do you need upfront? Furthermore, the precise amount of money that you have on hand will make a big difference both for providing a deposit on your property and to pay any upfront fees on your mortgage. You’ll also have costs like Stamp Duty and legal fees, among others, so it’s worth thinking in detail about exactly how far your finances will stretch. Lastly, make sure that you read the terms and conditions before finalising your mortgage – it’s absolutely essential that you fully understand what you’re signing for, after all.
