There are a number of things you need to consider when choosing a mortgage and with thousands of products available the choice can be baffling. What’s more, it’s an important decision to get right as it can make the difference of thousands of pounds.
Fixed vs. Variable
The first thing you need to do is decide whether you want to go for a fixed or variable rate mortgage.
The rates on variable deals are often lower than fixes – initially. Remember though that as the name suggests the rates can change and your monthly repayments may go up. You therefore need to work out whether you’ll still be able to afford your monthly mortgage payments if interest rates do rise. And don’t forget, the Bank of England base rate is currently at a historic low, so interest rates will start to go up at some point.
If the thought of higher mortgage payments worries you, then it’s worth opting for the security of a fixed rate loan.
You may pay more initially but at least you know your repayments won’t change for a set period of time.
Trackers vs. Discounts
If you decide you’re happy to go for a variable rate mortgage, it’s advisable to go for a tracker rather than a discount.
Trackers are directly linked to the Bank of England base rate so your mortgage rate will only change if there’s a change in base rate.
Discounts on the other hand are linked to the lender’s standard variable rate, which can change at the lender’s discretion.
And as many borrowers have discovered recently, banks and building societies are prepared to hike their SVR even if there’s been no change in base rate.
How long should I tie into my mortgage?
Whether you decide to go for a fixed or variable rate mortgage the other thing you need to think about is how long you are willing to be tied in for.
Most mortgages lock you in during the introductory period, and you’ll be charged a penalty – known as an early repayment charge – if you need to get out early. If you take a five-year fixed for example, you’ll pay a fee if you need to get out of the deal during the fixed term.
Therefore think carefully before you sign up because it could cost you thousands of pounds if you end up needing to get out of the deal early, perhaps because you move house or your circumstances change.
The one exception is term trackers, also often called lifetime trackers. Most of these are penalty free, leaving you free to remortgage at any time.
Don’t forget the fee
There are set up costs to pay when you’re taking out a mortgage and these can vary significantly.
As well as looking at the rate of interest, you therefore need to factor in the arrangement fees when comparing mortgage products.
It can sometimes work out cheaper over the term of the deal, to opt for a slightly higher rate in return for a lower fee. This will depend on the amount you are looking to borrow.
Get advice if you need to
Taking out a mortgage is a big decision – let’s face it you’re going to be borrowing tens if not hundreds of thousands of pounds – so it’s important to get it right.
If you don’t feel confident about making the decision on your own, speak to an independent mortgage broker who will be able to talk you through the options and weigh up the pros and cons.