The right mortgage could save you thousands over your lifetime, so it’s important to choose carefully. While most people focus on the interest rate as the deciding factor, it’s not the only thing you need to consider. Here’s what you need to weigh up when considering a mortgage deal.
Fixed rate vs. variable rate mortgages 📈
Interest rates on mortgages are either fixed or variable. With a fixed rate mortgage, the interest rate is guaranteed to stay the same for a certain period of time, as will the amount you pay towards your mortgage. For example, you’ll often hear fixed rate deals referred to as a ‘two-year fix’ or ‘five-year fix’. When this initial deal period ends, you automatically move onto your lender’s standard variable rate (SVR), where the rate can then change at any time. In contrast, the interest rate on a variable rate mortgage can go up and down at any time, depending on the Bank of England’s base rate. So, if the base rate increases or decreases, your interest rate and therefore the amount you pay towards your mortgage that month will too.
Should I get a fixed rate mortgage? 🧮
Choosing a fixed or variable rate mortgage is a question of whether you want to know exactly how much you’ll be paying towards your mortgage every month. While fixed rate mortgages can be helpful for budgeting, you won’t be able to benefit from cheaper monthly repayments if interest rates fall. You’re also locked in for the length of your initial deal period, and there’s usually a costly early repayment charge for switching to a different rate or repaying your mortgage before it ends. A variable rate mortgage could be a great option if you can afford some flexibility in your budget, because you’ll pay a different amount every month. However, even if the Bank of England’s base rate is low when you take out a mortgage, it can fluctuate at any time, so your repayments could also go up.
How long should I fix my mortgage rate for? ⏳
The length of time you fix for is important, because that’s how long you’ll be tied into your deal. For example, be careful not to fix for five years if there’s a chance you could sell up and move home in two or three years, as you could pay thousands in penalty charges for leaving your deal early. As a rough guide, try to time the length of the deal with the same amount of time you expect to live in the property. A mortgage adviser can help recommend a mortgage that aligns with your life plans, so you won’t be caught out later.
Repayment vs. interest-only mortgages 🏦
The next decision to make is whether you want to pay back your mortgage on a repayment or interest-only basis. With a repayment mortgage, you pay off the ‘capital’ amount you’ve borrowed over the term (for example, 30 years), plus the interest charge on the amount you owe. As long as all repayments are made in full and on time, you will have repaid the whole mortgage by the end of the term. With an interest-only mortgage, your monthly payment only covers the interest (not the capital amount borrowed), so your payments are cheaper in the short term. You will need to save enough during the term to repay the capital at the end. Lenders will want to see evidence of a savings plan!
Types of mortgages 🤔
We cover the main types of mortgages in our rundown of how mortgages work, but here’s a recap:
- Offset mortgage – Your mortgage account is linked to your savings account and you only pay interest on the difference between the two balances. Paying less interest means you’re more likely to pay off your mortgage sooner than if you were paying interest on the full amount.
- Tracker mortgage – Variable rate mortgages where the interest rate is linked to another rate, usually the Bank of England base rate. The interest rate moves up and down along with the rate it ‘tracks’, meaning your monthly repayments won’t be the same from month to month.
- Discounted rate mortgage – Variable rate mortgages where the interest rate is discounted below the lender’s standard variable rate for a set period of time, such as two or five years. Because the lender can change this rate at any time, your interest rate can also go up and down and your monthly repayments can vary from month to month.
- Capped rate mortgage – Variable rate mortgages with a cap on how high the interest rate can rise. The interest rate is usually higher than a tracker mortgage.
- Buy-to-let mortgage – Designed for people who want to buy a property then rent it out as a landlord. The minimum deposit is higher than other mortgages, starting at 25%. They’re usually interest-only, but are sometimes available on a repayment basis.
How long should my mortgage term be? 📅
As well as the length of your initial deal (for example, a two-year fix at 1.35%), you also need to choose how long you want the term of your mortgage to be. Mortgage terms can be 25 or 30 years, but you can condense repayments into fewer years or spread the cost over as much as 40 years. Generally, your monthly repayments will be higher on a shorter mortgage term, although you’ll pay less interest in the long run. The reverse is true for longer terms: your monthly repayments will be lower, but you’ll pay more in interest over time. A mortgage adviser can help recommend a mortgage that aligns with your life plans, so you won’t be caught out later.
What are ‘fee-free’ mortgages? 💷
When trying to cut costs, a ‘fee-free’ or low-fee mortgage can be tempting, but these deals often come with higher interest rates than mortgages with upfront fees. On the other hand, mortgages with the lowest interest rates often have high set-up costs, such as product or arrangement fees, so if you’re planning to remortgage every two years, these can really add up over time. When you apply for a mortgage, you’ll be sent a ‘mortgage illustration’ which breaks down the fees, interest rate and total cost of your mortgage, among other factors. This is a handy way to quickly compare mortgages, but a mortgage adviser can also walk you through your options.
Should I overpay my mortgage? 💰
A ‘flexible’ mortgage allows you to overpay (or sometimes underpay) when you want to, whether that’s paying slightly over your agreed monthly amount or paying off a lump sum. Overpaying your mortgage is a great way to trim down your mortgage debt and reduce the interest you pay over time, but overpayments are usually capped at 10% of your outstanding balance per year. Just be sure to check if your lender allows this first, or you could be charged an early repayment penalty fee.
How do I find a mortgage? 🔎
If you’ve seen a mortgage deal that you like, you can apply directly with that lender, but you might be missing out on even better deals that are only available to mortgage brokers. With Moneybox Mortgages, you can get access to deals from over 90 lenders! We can help you choose a mortgage that’s right for you and get your application underway when the time is right. We’ll walk you through every step of your journey, whether you’re buying a home or remortgaging. Best of all, our service is completely free, so you can relax knowing you’re not paying unnecessary fees.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Moneybox Mortgages is provided by Moneybox Mortgages Ltd.