House-hunting season is now in full swing and whether you’re a first-timer about to snap up a new home or looking for a better deal on your mortgage, here’s how to find your way through the maze.
Sue Hayward is a journalist and author specialising in money, consumer and family financial issues. She’s written for national newspapers and appeared on BBC Breakfast and Radio 2’s Jeremy Vine Show. Her latest book, How To Get The Best Deal, is full of money-saving advice.
How much can I borrow?
You can still get 100% loans but these deals are very limited. To bag the best rates on offer you’ll need some savings, as generally the bigger your deposit, the better rates you can secure. And the best deals tend to be available to buyers with a 20–25% deposit. But there’s good news for smaller savers, as there are now 59 mortgage products for buyers with a 5% deposit*, over 50% more than this time last year.
Which mortgage is right for me?
Aside from how much you want to borrow, the next question is whether you want an interest-only or repayment mortgage.With an interest-only mortgage you pay back the interest on the loan only. So when your mortgage term ends, it’s down to you to repay the original amount borrowed.
With an interest-only mortgage you pay back the interest on the loan only. So when your mortgage term ends, it’s down to you to repay the original amount borrowed.
With a repayment mortgage you pay back both the interest and a chunk of what you’ve borrowed. This means payments will be higher, but you’re guaranteed to own your home outright when you make that last payment.
Next, you need to choose your rate. You can stick with your lender’s standard mortgage rate, or go for other options including fixed or tracker deals.
Fixed mortgages
A fixed deal does what it says on the tin: you agree to pay a fixed rate of interest for a fixed time, often anything from one to 10 years. Regardless of what happens to mortgage rates during this time you’re protected from any rate rises, but if you fix it for the long term you could lose out if rates tumble.
Tracker mortgages
Rates ‘track’, or follow, the Bank of England base rate and are usually set at a percentage above (or below) base rate. Most tracker deals run for a fixed time, although some lenders, such as The Co-operative Bank, offer ‘lifetime tracker’ deals for the life of your mortgage. With a tracker deal, you’ll pay less if rates fall, but the gamble is that if rates rise, your payments will go up. Move that mortgage Switching mortgage deals isn’t just for when you move house. You might want to remortgage and borrow more for a new kitchen, for example. Always ask about any conditions. Some lenders may insist you take their building insurance, so you won’t get to shop around and you’ll usually have to cover the cost of valuation and legal fees, although with The Co-operative Bank remortgage service you’ll get this free.
It’s payback time
It’s a good idea to check the small print, as bagging a ‘deal’ usually means you’re committed for a fixed time or risk hefty penalties if you then decide to switch mid-term.
As with any loan, it makes sense to pay it off as quickly as possible so you save money on interest. There is no point in stashing your money away in a low-rate savings account if you then pay a higher rate on your mortgage. So if you’ve got spare cash or have landed a bonus, I would suggest that you ask your lender if you can ‘overpay’ when you’re able to.
Jargon-buster
APR – annual percentage rate. This is the rate to look at when comparing deals, as it factors in costs and charges. Base rate. Set by the Bank of England (currently 0.5%), it’s used as the benchmark for lenders’ rates.
LTV – loan to value. This is the amount you can borrow compared with the property value. If your lender offers 75% LTV, this means a £75,000 loan on a £100,000 property.
If you would like to find out more about mortgage options visit The Co-operative Bank