Most people will need to borrow money to buy a home, but where do you start? The abundant choice can be overwhelming but MoneySuperMarket can help you find the right mortgage for your circumstance.
You might be buying your first home, or you may want to remortgage, do you want a fix-rate mortgage or do you want to buy to let? There are plenty of different types of mortgage you can choose, all of which you’ll need to research before finding the right deal for you.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
As the name suggests, a fixed-rate mortgage has an interest rate that stays the same for a set period of the term, say three to five years. It is not unheard of for the lender to fix the rate for 10 years or even longer.
The attraction of a fixed-rate mortgage is that your payments stay the same throughout, and you don’t need to worry about interest rates rising.
For example, if the Bank of England’s base rate goes up and lenders increase their standard variable rate (SVR) loans, you will continue to pay the same rate.
The flip side to a fixed-rate mortgage is that you don’t see the benefit of any interest rate reductions. Plus, you will probably need to pay a fee or penalty if you want to get out of the deal before the end of the term.
When you reach the end of the fixed-period, you will go back on the lender’s standard variable rate for the rest of your mortgage term unless you opt to switch to another product.
If you have savings, you can link these accounts to your mortgage and pay less interest with an offset mortgage. This type of mortgage means you forego earning interest on your savings in order to save paying interest on your mortgage.
Offset mortgages are often worthwhile because mortgage interest is usually much higher than any savings interest you will earn. They are becoming more popular because accounts and ISAs with rates that can compete with offsetting are hard to find.
If, for example, you had a mortgage of £100,000 but you also had savings of £20,000, then you would only pay interest on the remaining £80,000.
The savings are still available to you in the account, but they are just offsetting the cost of your mortgage interest rather than accruing interest in the account. Obviously, if you use the savings, the amount you save on your mortgage is reduced.
You can either keep your monthly payments the same to pay off the mortgage early, or you can choose to lower your monthly payments according to the credit balance in your linked accounts.
Buying a property to let out as a landlord could be considered a good investment, due to the long-term increasing price of property and demand for rented accommodation.
There are certain differences in purchasing a house to rent out that you need to be aware of. Firstl, you will need a buy-to-let mortgage rather than a residential loan. Many lenders have loans specifically for landlords, with different rates of interest and a higher deposit.
If you attempt to buy using a standard mortgage you may run into trouble with your lender as they charge higher rates for landlord loans. This reflects the risk they take of not being repaid because you can’t afford the repayments (because, for example, you do not receive rent).
While similar to a residential mortgage, a buy-to-let loan will need a higher deposit to get the good interest rate deals. For example, you can get a regular mortgage with a 10% deposit, but a buy-to-let mortgage will need a 25% deposit, or 40% plus for the better rates.
And instead of calculating your rate on your income, buy-to-let mortgage lenders look at how much you will potentially earn from renting the property. Most lenders will want you to make at least 125% of the annual mortgage interest payments in rent.
So if your mortgage costs £20,000 in interest per year, for example, the lender would need you to earn £25,000 a year in rental income.
Mortgages for first-time buyers
Most mortgages are in theory available to first-time buyers, but you will find some specifically tailored for first-timers. This type of mortgage may include incentives such as cashback, low fees or even contributions to legal fees.
There are a few schemes to help you purchase your first home too. If you are considering a new-build, you should look into the Help-to-Buy equity loan from the government – they will loan you up to 20% of the deposit as long as you can front 5% of the deposit yourself.
This means that in total you could have a 25% deposit toward your new home, meaning that lenders will give you a lower interest rate.
Mortgage eligibility is not based on just the deposit you put down but a combination your salary and credit history, which will both be scrutinised.
Rising house prices mean that some people find it difficult to save the deposit necessary to buy a home. However, some lenders will lend up to 95% of the overall price, meaning you only need to raise 5% of the asking price as a deposit.
Occasionally some lenders will offer 100% mortgages, but these usually attract a high interest rate.
Interest-only mortgages can help you get on the property ladder, but they are one of the least popular types of mortgage for a reason.
As it says in the name, you will only pay off the interest to the lender and not the capital. This means that when you come to the end of the term, or if you sell the property, you will still owe the lender the entire amount you borrowed.
The advantage of an interest-only mortgage is that your monthly payments will be much lower than a repayment mortgage, because you won’t be paying back the loan to the lender.
But the disadvantage is that unlike with a repayment mortgage, where you would own the property outright at the end of the term, you don’t own anything with an interest-only mortgage. It’s the bank that owns your home.
Remember your mortgage is secured on your home. Your home may be repossessed if you don’t keep up repayments on your mortgage.
Check our mortgage calculator to see which mortgage would be best for your circumstances.