Most people will apply for a mortgage to buy their home. You’ll need to think carefully about which product you choose, including everything from the length of the term to whether you take out an interest only or repayment mortgage.Here we explain everything there is to know about mortgages and answer some of the questions you might have as you take steps towards moving into a place of your own.
Different types of mortgages available
One of the first decisions you’ll need to make is which type of mortgage to choose. Bear in mind that not all of them will be right for your needs - these are the most common products you are likely to come across.
If you take out a fixed rate mortgage, the amount you repay your lender stays the same for the length of the fixed rate period. So, if you take out a two-year fixed rate mortgage, you will pay the same amount every month for two years. This type of mortgage is useful if you want to guarantee how much you are spending on your mortgage each month.
However, if interest rates fall during your fixed rate period, your repayments will stay the same. Your lender might offer you different fixed rate terms, such as two- and five-year deals. If you decide this is the type of mortgage for you, you will need to choose how long you want to fix your rate for.
With a variable rate mortgage, the interest rate you are paying can move up and down. If the interest rate set by your lender falls, so will your mortgage repayments. On the other hand, a rise in interest rates could mean you spend more paying off your mortgage each month.
The Bank of England sets an interest rate each month, and tracker mortgages move in line with it. If the base rate rises or falls, the interest on your tracker rate mortgage will do the same.
Standard variable rate (SVR)
The rate you pay on an SVR mortgage is set by your mortgage lender.
In most cases, you will find yourself on an SVR mortgage once the term of your mortgage comes to an end. It will automatically revert to an SVR unless you have decided to transfer to another product. One of the main advantages of this type of mortgage is you are free to switch at any time.
Your lender may also offer you a discount mortgage, where they charge a reduced interest rate on their SVR product. The length of the deal will be set by the lender and, once it comes to an end, your home loan will revert back to the SVR.
Differences between interest-only
Once you have picked your mortgage type, you’ll need to choose between an interest-only and a repayment mortgage. Your decision will affect how long it will take you to pay off your home loan.
and repayment mortgages
Your mortgage will be made up of two parts - the capital, which is the amount you've borrowed, and the interest charged on the loan. If you take out an interest-only mortgage, you will only pay off the interest charged on your loan. This means you won’t be repaying any of the capital, so you might need to save money elsewhere to make sure you can eventually pay back what you have borrowed.
With a repayment mortgage, you will pay off some of your home loan as well as its interest every month. It is sometimes known as a capital and interest mortgage.
A repayment mortgage helps guarantee you will have paid off the whole loan amount by the time it comes to an end. You might also find you can access more competitive deals once your current deal finishes.
What is a mortgage in principle?
Some people apply for a mortgage in principle before buying a new home. This is when a lender will say that, if all your financial and personal information is accurate, they would be willing to lend you the money you need to buy a new home. A mortgage in principle can be reassuring, especially if your new home might not be completed for several months.
A formal mortgage offer might have expired by the time your home is ready. A mortgage in principle can usually be drawn up in 24 hours and will generally last between three and six months. You will need to check with your lender exactly how long yours will be valid for.
Do I need a mortgage in principle?
When you are buying a brand new home, it might take longer than six months for it to be completed. If this is the case, it can be a good idea to apply for a mortgage in principle.
However, even if you are given a mortgage in principle, it doesn’t guarantee your mortgage will be approved when you make your formal application. Your lender will look at your financial situation in more detail and make their decision based on the latest information they have.
Deciding which mortgage is right for you
You will need to think carefully about your budget when buying a new home, which means factoring any mortgage fees and charges into how much you can afford to spend each month. Some mortgages will come with an arrangement fee. In most cases, you can add this to the term of your mortgage and increase your monthly payments, or make an upfront payment.
If you are offered a mortgage that comes with charges and fees, and others that aren’t, you will need to do some calculations to figure out which one is right for you.
Where can I get help?
A mortgage advisor can help you find a product that suits your needs. They will discuss the different options and give you more detail on the repayment terms and interest rates of specific products. You should know that if you use a mortgage broker, they are likely to charge a set fee for their services, or a percentage of the amount you borrow from a lender. Check how much you will need to pay before using their services.
You might also want to arrange an appointment with one of our recommended independent mortgage advisors. They don’t charge for their services and can guide you through the process of choosing your home loan. One way to determine how much you can afford to pay each month is by using our mortgage calculator. By entering information such as how big a deposit you have and the price of the new home you want to buy, you will see some key figures that can help you come to a decision.