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Fixed rate mortgages
Fixed rate mortgages have an interest rate that stays the same for a set period. This could be anything from two to 10 years. Your repayments are the same every month and you don't need to fear fluctuations in interest rates. Most will charge you a penalty - known as an early repayment charge (ERC) - if you choose to leave the deal before the end of the fixed term.
Variable rate mortgages
Interest rates adjust periodically with a variable rate mortgage, which means repayments may change throughout the loan term. Usually, the interest rate changes in relation to another rate - the Bank of England's base rate is very influential on variable interest rates, as is the base rate of each lender.
For standard variable rate (SVR) mortgages, each lender has an SVR that they can move when they like. In reality, this tends to roughly follow the Bank of England's base rate movements. SVRs can be anything from two to five percentage points above the base rate – or higher – and they can vary massively between lenders.
Discounted variable rate mortgage
The other type of variable mortgage is a discount mortgage. Rather than being linked to the Bank of England base rate, discounts are linked to the lender's standard variable rate (SVR). For example, if the SVR is 4.50% with a discount of 1%, the payable mortgage rate is 3.50%. If the SVR rose to 5.50%, the pay rate would rise to 4.50%.
The problem with discounts is that SVR changes are at the lender's discretion so your mortgage payments could change even if there has been no alteration in the Bank of England base rate. What's more, even if the SVR changes following a move in the base rate, there is no guarantee that it will increase or decrease by the same amount.
As a result, trackers are usually seen as more transparent than discounted deals and are often seen as being fairer for the borrower.
When the base rate fell from 5.00% to 0.50% between October 2008 and March 2009, for example, Lloyds TSB was the only top 20 lender to reduce its SVR by the full 4.50%. All the others cut their rates by less.
When the Bank of England raised the base rate from 0.25% to 0.5% in November 2017, anyone who wasn’t on a fixed rate mortgage was at risk of seeing their repayments increase. A number of leading mortgage lenders followed and increased their tracker and/or SVR rates a month later.
Mortgage fees explained
Most mortgage deals carry arrangement fees, which can vary from a few hundred pounds up to a couple of thousand.
Also bear in mind that these set up costs can sometimes be made up of two fees. An increasing number of lenders charge a non-refundable booking fee, which is effectively a product reservation fee. If your house purchase falls through and you don’t end up taking the mortgage deal, you won’t get this fee back.
The second type of fee is an arrangement fee which you pay on completion of the mortgage so you won't have to pay it if, for any reason, you don't take the mortgage.
When your current mortgage deal comes to an end and it’s time to remortgage, remember to reduce the term on the new deal that you apply for. For example, if you took out a two-year fixed rate over a 25-year term and the fixed rate is coming to an end, when you remortgage you should be aiming to bring the term down to 23 years.
Consider the fees
Remember to always factor these into the overall cost of any deal. Even if a lender is offering a seemingly unbeatable rate, steep fees could mean that it actually works out to be more cost-effective to opt for a higher rate, but with a much lower fee, or no fee at all.
The best mortgage rate for you depends on how much you are looking to borrow. A high fee is often worth paying in order to secure a low interest rate if you are applying for a large mortgage. But those with smaller mortgages could be better off opting for a higher rate and lower fee.
However, while this is the general rule, it is well worth crunching the numbers when you are comparing mortgages - you need to work out the total cost over the term of the deal. For example, if you are going for a two-year fix you need to work out the cost of your repayments over the term. You can do this by finding out what the monthly payment will be using our mortgage calculator – and then multiply by 24. You then need to add on the arrangement fee to find out the total cost.
You will likely find that you have more mortgage deals available to choose from if you have a good credit history, so it’s worth making sure that your credit report is as good as it can be before applying for a mortgage. Steps like paying off any outstanding borrowed credit you owe and making sure your current address is on the electoral role can help to improve your credit score.
Save a deposit
The more money you can save as a deposit, the less you’ll need to borrow as a mortgage loan – and having a bigger deposit can help you get access to more competitive mortgage rates. Lenders will often have a maximum loan to value they’re prepared to offer you, and the rest will need to be made up with either a deposit or an equity loan like the government’s Help to Buy equity loan scheme.
Compare mortgage deals
Using a mortgage comparison tool can help to give you a better idea of how much you’d need to pay in monthly costs and interest, the duration of the deal, the maximum LTV and any product fees you may need to pay for the mortgage deals available based on your borrowing requirements. It’s important to remember though that the actual mortgage deals you’re offered when you go to make an application may differ because they will then be influenced by your financial situation and credit history.
Looking for mortgage advice?
Get free mortgage advice, and see deals from the whole of the market, with broker London & Country. Call free from your landline or mobile on 0800 170 1943 any day.
Hotel of Mum & Dad
With around 4.5 million adult children living at their parents’ house, the Hotel of Mum & Dad is a major part of British life.
In most cases, the situation arises out of necessity. Rents are sky-high, and getting on the housing ladder is notoriously expensive in many parts of the country, so children have little choice but to return to the family home.
But that in itself brings its own pressures and concerns for parents and their offspring. What are the additional costs of having another person under the roof? How do family members get along on a day-to-day basis when they might have different schedules, responsibilities and preferences?
We’ve explored these and related issues in a survey of what is undoubtedly the biggest hotel chain in the UK. And we’ve built an interactive calculator so that parents and children alike can work out how much they’re spending or saving by being in their own Hotel of Mum & Dad.
How do mortgages work?
A mortgage is a type of loan that a bank or building society lends to you to help you buy a property. The amount of mortgage you need to borrow will depend on the amount you’ve saved up to put towards a deposit for a property, and the amount you still need to reach the purchase price of the property you want to buy. So the amount of mortgage you then take out will be a percentage of the purchase price – which is called a loan-to-value or LTV.
How much mortgage can you afford?
The amount of mortgage you can afford is based on your yearly income and any financial commitments you already have.
You can use our mortgage calculator to help you figure out how much a mortgage might cost you in monthly repayments based on the purchase price you enter and the amount you’d need to borrow as a mortgage loan, as well as the interest rate charged. This should give you a better idea of how much mortgage you could afford to pay each month.
Whether a lender will let you borrow this amount though will also depend on your credit history and mortgage term.
What are mortgage interest rates?
Mortgage rates are the rate of interest charged on a mortgage. They are determined by the lender in most cases, and can be either fixed, where they remain the same for the term of the mortgage, or variable, where they fluctuate with a benchmark interest rate.
Before you compare mortgage rates, you first need to understand the different types and how they work.
What else do you need to consider when looking for a mortgage?
Mortgage term: most people opt for a 25-year term when they take their first mortgage out - but you can choose a longer or shorter period of time. If you opt for a longer term, your repayments will be lower but it will take you longer to pay off the debt. The shorter the term, the sooner you'll be mortgage free. So the shortest term with the most affordable fee is often a better option.
Deal length: given that most mortgage products have an early repayment charge (ERC) if you end the mortgage deal early, it’s important to think about how long you’re happy to tie yourself in for. For example, if you think you might move in the next few years, you'd be better off going for a two or three year product rather than locking into a five year product. It can cost thousands of pounds to get out of a mortgage early as the penalty is usually a percentage of the outstanding mortgage. So if your mortgage if £100,000 and the ERC is 2%, you'll have to pay £2,000.
Repayment or interest-only: you can take your mortgage out on a repayment basis or interest-only.
With a repayment mortgage your monthly payments are calculated so you're paying some of the capital off as well as the interest and will have repaid the entire loan by the end of the term.
Monthly payments on an interest-only mortgage, on the other hand, just cover the interest – which means you'll have the original loan to pay in full at the end of the term. The idea is that you have a repayment plan in place, such as ISA investments, so you’ve built up the lump sum you need by the time your mortgage ends.
However, interest-only mortgages are getting harder to come by because lenders are concerned about the risk of too many people taking out interest-only mortgages with no repayment plan in place – which means that lenders that do offer this mortgage type may only offer them to people with very large deposits.
How do you get a mortgage?
You can apply for a mortgage through a bank or a building society. You can go directly to your bank or building society to do this – but it can be a good idea to compare the different mortgage deals on the market to help you find the best deal for your borrowing needs. Our mortgage comparison tool shows you the mortgage deals offered by the providers we work with, and you can sort the results to find a mortgage that best suits your borrowing needs. You can then apply for a mortgage directly through them. Alternatively, you can use a mortgage broker to help find you a mortgage deal – London & Country offer mortgage advice completely free of charge on 0800 073 2310.
What is a mortgage in principle?
A mortgage in principle or an agreement in principle is confirmation of how much a bank or building society would be prepared to lend you in theory – based on the information you’ve given them – and this can help show that you’re ready to buy when it comes to making an offer on a place. It’s important to remember though that a mortgage in principle is not a guarantee that a lender will let you borrow that much, and they can still decide not to lend to you when you come to make a full mortgage application. This is because a full mortgage application also looks at your full credit history and financial situation.
What happens to your mortgage when you move house?
Many mortgages are portable, so in theory you can take your existing deal with you when you move. However, it’s unlikely that the mortgage on your new house will be exactly the same as that on your existing home.
Unless you're downsizing, you'll probably need to borrow an additional amount. This is possible, but it is likely to be at a different rate than you're paying on the existing mortgage so it all gets a bit more complicated. It's therefore simpler if the fixed or introductory term has ended and you're out of the penalty period when you come to move.
You’ll also need to go through the same affordability and credit checks you went through to get your current mortgage deal to make sure you could afford to borrow more. There will also be some mortgage fees you’ll need to pay when moving house, including a property valuation, legal fees and stamp duty. Our home movers guide has more information about what happens to your mortgage when you move home.
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Find the best mortgage deal
Finding the best mortgage to suit your needs can be a challenge. The best mortgage deals tend to be available to those with larger deposits as this means less risk for the lender.
This is where MoneySuperMarket can help you. Our mortgage comparison service covers a wider range of deals on the market, and, once you've answered a few simple questions, it can help narrow down the options available to you.
If you need advice, we've partnered with broker London & Country Mortgages, who can talk you through the range of mortgage deals and help you through the application process once you've decided on the best mortgage for you.
When you compare mortgages, we show you deals from all the lenders on the market. We list mortgages according to their initial monthly cost, from highest to lowest, but you can use the filters to change this if you like. You can find out more about how we work here.