Choosing the right mortgage
Are you thinking of buying your first home?
Getting informed about mortgages
When you get a mortgage, you’ll need to make sure you can afford the repayments each month, if you can’t keep up with the repayments, your home may be repossessed.
A mortgage adviser will be able to help you make your choice, to find a mortgage that suits your needs and, crucially, one you can afford.
It's never too early to plan ahead and consider what type of mortgage would suit you best.
There are many different types of mortgage available, offering many different rates, and it can be hard to understand what’s on offer and to choose between them.
It helps to look at comparison websites to see what sort of deals are available. But before you do, you need at least a basic understanding of the different types of mortgage available.
- Competitive rates
- What else to look for in a mortgage
- Interest-only versus repayment mortgages
- From SVR to guarantors
Getting an affordable rate is an essential part of finding a mortgage that’s right for you. Usually the larger your deposit, the lower the interest rate you’re likely to get. Below are the different types of mortgage products:
- Fixed-rate mortgages: With a fixed-rate mortgage, your payments stay the same for a fixed period of time. If you do choose to get a fixed-rate mortgage, then you have the tricky job of deciding how long to fix it for; this depends on what you think will happen to interest rates.
- Tracker mortgages: A tracker mortgage offers a rate that moves up and down in line with the Bank of England Bank Rate for a set period.
- Discount mortgages: With a discount mortgage you will be charged the lender's standard variable rate minus a fixed percentage for a set amount of time (generally between two to five years.
While rates are really important when choosing a mortgage, there are other considerations too
As well as the rate, several factors contribute to how much your mortgage will set you back.
One helpful way to compare the costs of different mortgages is by looking at the APRC, which stands for Annual Percentage Rate of Change. As well as the interest rate, the APRC takes some mortgage fees into account and expresses it as a percentage.
Using the APRC to compare deals can be particularly helpful as some mortgages initially offer a lower rate of interest, which may then increase.
The length of the mortgage is another important consideration. While mortgages typically last 25 years, first time buyers have been increasingly choosing longer loans. Research by the Financial Conduct Authority (FCA) found two thirds of first-time buyer mortgages now have terms of more than 25 years. This can mean smaller monthly payments in the short term, but on the flipside, it’ll take you longer to pay off the loan and you’ll pay more in interest.
These might include how often interest is calculated. Some mortgages charge interest monthly or annually, but daily is cheaper.
Also, find out if a mortgage is flexible, meaning that you could take a break from making payments if you really needed to; or, on the flipside, you could overpay your mortgage without being charged.
Most mortgages are repayment mortgages, meaning you pay back a part of the loan each month, together with some interest.
An alternative option is an interest-only mortgage. You just pay the interest back each month, leaving you still owing the lump sum that you originally borrowed; this must be paid back at the end of the mortgage term. Not all lenders offer interest only mortgages, and those that do have quite strict criteria that need to be met to offer this kind of loan. It’s also important to remember that with an interest-only mortgage, a large sum is due at the end of the mortgage term.
Other mortgage types and options you might come across or consider, include:
- Standard Variable Rate mortgages: Each lender sets their own standard variable rate (SVR). With most mortgage deals, your interest rate will revert to this rate after the initial period comes to an end.
- Shared equity mortgage: Buyers own the property but have help in the form of an equity loan from a housing association of up to 20% of the property’s value, a 5% deposit and a mortgage of up to 75% for the rest.
- Shared ownership: You buy a share of your home, of between 25% and 75%, and pay rent on the rest.
- Help to Buy Schemes: These government schemes offer shared equity mortgages for first time buyers and shared ownership mortgages in England. You can find out more details at the government's Help to Buy page. In Wales the government offers a shared equity scheme. You can find out more at the Welsh government's Help to Buy page until March 2022.
- Joint mortgage: You buy a home with other people, such as friends, for example if your deposit or monthly income isn’t enough on its own.
- Guarantor mortgage: A guarantor, such as a parent, promises to cover any missed mortgage repayments if you can’t afford them.
This is just an introduction and there are other options and considerations. Taking on a mortgage is a big commitment, so it’s essential you know what you’re letting yourself in for and can afford the monthly payments. If you can’t keep up with the payments, your home may be repossessed.
Click on the sections below to explore what you need to know at each stage of your home buying journey: