Taking out a mortgage can be complicated, and even stressful at times. There are so many options, it can be hard to know which is the best option for you. We’re all about taking the stress out of moving home, so we’ve cut the jargon from the mortgage process to create this brief guide to help you understand the options available to you when you want to get a mortgage or remortgage your home.
When taking out a mortgage, there are two elements that you need to consider, the interest rate and the repayments. We’ve broken down the different types of mortgage you can get, what they entail and why people usually choose them. This way, when you go to the bank or lender, you know more about what you’re looking for. We’ve got some extra advice from mortgage expert, Raymond Boulger, Senior Technical Manager at mortgage broker John Charcol.
The mortgage rate is the interest rate you pay back on the money you borrow. It is set by the lender.
Fixed rate mortgage
WHAT IS IT? The interest rate will remain the same throughout an agreed period of time set by you and the lender when you take out the mortgage, usually between two and five years.
WHY SHOULD I CHOOSE IT? This is a popular choice, especially for first time buyers, combined with a repayment mortgage, but means that you have to live at the mortgaged address for the term of the fixed rate or incur a penalty. It’s similar to being locked into a mobile phone contract.
It also gives you peace of mind that payments won’t fluctuate with changing rates, so you always know what your monthly outgoings will be, although you could miss out on savings if there’s a reduction in rates.
WHAT THE EXPERTS SAY: “The vast majority of people, around 85%, take a fixed rate mortgage. But it’s important to quantify how long they’re fixing for. Since Brexit, there’s been a sharp fall in longer term rates, so as a result we’ve seen a drop in 10 year fixed rates, and five year rates have come down a bit too, so a higher proportion are taking fixed mortgages over a longer rate to take advantage of the low rates,” says Ray Boulger.
WHAT IS IT? The interest rate you pay on a tracker mortgage will vary depending on the Bank of England base rate. As MoneySupermarket advises, If the base rate was 0.50%, and you took a tracker mortgage with a rate that is 2% above the base rate you’d pay an interest rate of 2.50% . If the Bank of England put the base rate up to 1%, your mortgage rate would increase to 3.00%. This would add about £25 a month to the repayments on a £100,000 mortgage.
WHY SHOULD I CHOOSE IT? Introductory tracker rates are one of the lowest you can get, so if the base rate is low, it is a popular choice for people looking for a bargain. You will often get a lower rate than on fixed rate mortgages, but as it relies on the Bank of England, it can be unpredictable.
WHAT THE EXPERTS SAY: “Tracker rates can be a good option for a short term deal at the moment while the rates are so low. However, in the next few years rates may move up but are highly unlikely to fall, so few people are currently taking out five year tracker mortgages,” says Boulger.
Standard Variable Rate mortgage
WHAT IS IT? The rate you pay on an SVR mortgage is determined by your mortgage lender, so is dependent on the bank or lender you borrow from. It could vary if the Bank of England base rate changes, but it is at the discretion of the lender. And they could increase or decrease the rate at any time.
WHY SHOULD I CHOOSE IT? This rate is often chosen by home-owners who have already taken out an introductory fixed rate or a tracker mortgage. They do not usually have early repayment charges, which gives the option to repay the mortgage off early, and there are often no arrangement fees.
WHAT THE EXPERTS SAY: People who don’t want a fixed rate will go for a tracker or discount (discount of SVR), but nobody tends to take SVR initially. Up to 2007, people would go for a tracker because that guaranteed interest rates moving in line with bank rate, but now the boot’s on the other foot – with rates being on the floor, there’s no further reduction in tracker rate you can expect. If you have a SVR on the other hand, lenders can change the margin – so when the base rate moves up, not all of the increase may be reflected in SVR, which can work to your advantage,” says Boulger.
The monthly payment made to the lender to pay back the mortgage.
The repayment mortgage is the most popular type of mortgage, where you make monthly repayments over an agreed period of time, gradually paying off the money that you borrow (plus the interest). The longer the agreed term, the lower your monthly repayments will be, e.g. You could opt for a 35-year mortgage and pay back less, but as a result you will pay back more interest. By the end of the term you will have paid back the loan and have full ownership of your home. (Technically, in legal terms, you have full ownership of the home even while you have a mortgage)
Interest-only mortgages have cheaper monthly repayments because you only pay back the interest, not the balance of the loan. This means you need to make other arrangements to pay off the capital of your mortgage, as you may not necessarily have finished repayments by the end of your mortgage term.
Although it is cheaper in the short-term, you end up paying more interest overall.
An offset mortgage is different to the traditional mortgage set-up as it is linked to your savings accounts. It can be set up as a repayment or interest-only mortgage. It’s an effective way to manage your finances in a way that allows you to earn interest on your savings at the same rate as your mortgage. It gets its name because your mortgage is ‘offset’ against your savings: the money in your savings account can reduce (offset) the interest paid on your mortgage. Because you’re paying less interest,you can pay off more of the amount borrowed. The monthly repayments are usually less than a repayment mortgage and you can put any extra money into your savings account, rather than early repayment, and then if you need access to it, you can still withdraw it.
The best mortgages for…
First time buyers
Help to Buy
The Help to Buy second charge equity loan scheme is only available on new build properties worth up to £600,000. You need 5% deposit and the government will lend you 20% of purchase price; (40% in Greater London); you get a normal repayment mortgage for 75% of the purchase price; the equity loan is interest free for the first 5 years. When you repay the government, probably by selling the property or remortgaging, the government takes 20% of sale proceeds.
Boulger advises: “In exchange for interest free money and then a low rate, theGovernment takes 20% of any capital gain, but if the property sells at a loss, they also share 20% of the loss. As you only need to borrow 75% of the purchase price on a normal repayment mortgage, instead of the whole 95%, you qualify for a much lower interest rate as well as making monthly payments on a lower amount. This gives you more money to do other things with like redecorating and renovating, or you could buy a more expensive property, perhaps in a nicer area, or go from a 1 or 2 bed to a larger property and thenperhaps not need to move again so soon, which will save you money on legal fees and stamp duty in the long run.”
Buying with a partner (not married)
Springboard Mortgage (Barclays)
If a family wants to provide money towards the deposit for a houme but wants to retain control of their money, perhaps because their child is buying with a partner, Boulger recommends the Springboard Mortgage (currently offered by Barclays). “The family member puts 10% down, but has to leave it on depsoit with the bank for three years. The interest rate on the deposit is 1.5% over 3 years – the savers’ money is at risk if their child defaults on payments, but after 3 years the family member, the borrower can withdraw their money.”
Buying a family home
A Standard Variable Rate mortgage is a choice for people who don’t want to lock into another deal, perhaps to maintain flexibility on repaying their mortgage. Although about a third of borrowers are on an SVR these are mainly either people who are mortgage prisoners, have a small mortgage or are on a very low SVR linked to Bank Rate, typically paying under 2.5%.
For most people the most difficult decision is not whether to have a fixed or variable rate (discount or tracker) but how long to fix for. Boulger advises: “2 year fixed rates are lower than 5 and 10 year fixed rates but they only provide protection against interest rates increases for a period when any increase is likely to be tiny, whereas longer term fixed rate provide protection when the outlook is more uncertain and also make it easier to budget over a longer period.”
He also suggests that people looking at investing should take advantage of the uncertainty of Brexit. “One of the benefits of Brexit has been to push interest rates down even further as the market now expects Bank Rate to remain very low until at least 2019. This gives both first time buyers and movers a golden opportunity to lock into all time low mortgage rates by choosing a fixed rate mortgage.”
If you are still unsure about what mortgage is best for you, you can go to a mortgage broker who will act as an intermediary to find you the best deal. You might have to pay for their services, usually a small percentage of the mortgage you take out, but you can rest assured that they will find the best deal for you. They offer unbiased advice and present you with a range of options that are suitable for you. A broker can apply for mortgages on your behalf, chase them up and ensure that the process is in-line with your house purchase, and importantly, they know which ones offer a hard or a soft search so they can make applications with minimum effect on your credit report.
When You Move works with a range of mortgage brokers who, like us, work to make the process as stress-free as possible. Get in touch if you would like us to recommend a broker, or if you would like us to help with the conveyancing of your property once you have arranged the mortgage.