The chances are, the biggest loan you’re ever going to have is a mortgage and that prospect puts many people off even attempting to do their own research and selecting a mortgage that’s right for them.
When looking for a mortgage the most important thing to remember is that what you’re after is essentially a big loan. Unfortunately, as it’s a financial product, there is some jargon involved which I’ll cover as we go on.
There are 4 important factors to take into account when looking for a mortgage:
- Amount you want to borrow
- Length of mortgage
- Interest rate
Amount – This is pretty simple. The more deposit you have the smaller the mortgage, which in the long run is a win for you. So apart from saving more for the deposit, there isn’t much more we can do here.
Mortgage Length – This is going to depend on your situation. The shorter the mortgage length, the more your monthly payments are going to be, however in the long run you’re going to have paid less interest on the loan. Meaning you’ll be better off sooner. Now depending on the mortgage provider, they may allow over payments, which gives you the flexibility of over paying when it suits you. Overpaying will also shorten the mortgage length. Mortgage providers tend to gloss over any overpayment allowances/restrictions, this is because they don’t want you to pay it off any sooner but it’s definitely worth knowing this information.
Interest Rate – Each mortgage provider is going to be vying for your custom, so be on the lookout for a competitive interest rate. Now it’s important to understand it’s not just a case of going with the cheapest rate as there might be steep application/booking fees with the mortgage, which could mean you would be better off getting a slightly higher interest rate and smaller or no fees.
Fees – It would appear each provider uses its own terminology when it comes to fees but two of the main ones I’ve seen are booking fee and/or application fee. In my opinion, you should be able to get a perfectly good deal without paying any fees at all. You just have to do a little digging.
The MoneySavingExpert has a great first time buyers guide which breaks down the fees which may be applied.
Ok, enough babble, example time.
||2 Years fixed interest rate
Using the excellent MoneySavingExpert mortgage comparison tool, it’s come up with two mortgages which look similar but have a very big difference.
The initial interest rate on offer is nearly the same 1.90% vs 1.93% (this is the interest rate you’ll be paying on the loan for the first two years) and the monthly mortgage payments are similar £628 vs £630. However, there is over a £10,000 difference in the total amount payable (highlighted in the red boxes). This is down to the fact that after the 2 years, the mortgage provider will put you onto their Standard Variable Rate (SVR), which is usually much higher than the rate you first get. The SVR for the first mortgage is 5.49% vs 4.99% on the second mortgage. Now, 0.5% doesn’t sound like a lot but over the 23 years you’ll be paying back the mortgage, as we’ve seen, it will add up to over £10,000 more being paid for the same mortgage. I don’t know about you but I’d definitely prefer that £10,000 stay in my pocket rather than someone else’s.
Now in reality after the 2 years you should be looking around to see what mortgage providers are offering for another fixed term. Invariably, these interest rates will be cheaper than the SVR so it’s a must do when your fixed term comes to an end.
This example uses just the one online tool. However, make sure you use a number of online tools as not one tool will cover all the mortgage providers out there.
You might be wondering, hey, just above you mentioned something about fee free mortgages, where do I get one of those? One provider that has them is HSBC, using the same details as above, HSBC’s online mortgage comparison tool presented this mortgage:
As we can see, the initial interest rate is higher than the 2 previous mortgages at 2.34% however the SVR you get put on after 2 years is 3.94%. That is significantly lower than the first two we looked at which were 5.49% and 4.99% respectively. So in the long run, your total amount payable would be much lower with the mortgage from HSBC. This mortgage doesn’t have any fees either compared to the £1,414 and £999 set-up fees of the previous two mortgages.
As always, do your own research and calculations when it comes to this as everyone’s situation is different.
Now I’m not saying that a mortgage advisor isn’t worth it, if the above scares you then don’t feel silly about arranging to use one. I know many people who have had one and they have been very happy with the service they have received and the mortgage they have ended up with.
The first question you’ll want answered is how is this advisor making a living? Some brokers charge a flat fee to find you a mortgage, some charge a percentage of the mortgage value (avoid at all costs, the paperwork for filling out a mortgage cannot be that much different when wanting £100,000 or £300,000) and some don’t charge a fee. Those that don’t charge a fee tend to get a kickback from the mortgage provider for sending the business their way.
They will all no doubt advertise they search the entire market but I highly doubt they do. Admittedly there are mortgages that can only be obtained with the use of a broker but having seen the interest rates on offer direct from mortgage providers, I highly doubt a broker can do much better in terms of the initial interest rate and fees.
I’m hoping you’ve found this useful and it’s given you the confidence to go off and do more of your own research and to select a mortgage that’s right for you (not your broker). I’m also hopeful that in the long run, this will help keep more of your hard earned cash in your pocket.
Our next stop will see us look at the solicitor/conveyancer fees that come with a house purchase.