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The Complete Mortgage Guide

Buying a property is probably the biggest and most exciting financial decision that you are likely to make, and for most people, this involves borrowing money with a mortgage. Here we look at the different types of mortgage.

Standard variable rates vs. fixed rates

  • Standard variable rate mortgage – The standard variable rate (SVR) is a mortgage lender’s standard interest rate for mortgages. SVRs tend to be much higher than fixed, or tracker interest rates and tend to move in line with the Bank of England base rate, although lenders can change SVRs at any time. At the end of an introductory rate like a fixed rate or a tracker deal, you will normally move on to the SVR. It is generally not a good idea to be on the SVR, and you may be able to save money by switching to a new deal.
  • Fixed rate mortgage – With a fixed rate mortgage the interest rate will not change for a set period of time and as a result it protects you against interest rate rises. Of course, if interest rates fall you won’t benefit from this either. You can normally fix your mortgage rate for two to five, or even as long as ten years.

If you are already on a fixed rate deal, before remortgaging, you need to take into account any early repayment penalties. Early repayment penalties can be very high, and it could cost you 1 to 5% of the amount you borrowed to move to a new lender if you are in the fixed rate period. However, it may still be worth switching as you may be able to save money, or you may decide you want the security of a fixed rate.

Mortgages for first-time buyers

In recent times the average age of first-time buyers has risen steadily due to the difficulties faced by prospective purchasers because of rising house prices. Before thinking about buying your own house or flat with a mortgage, you need to save a deposit. The minimum you will need is usually 5% of the purchase price. The more you can put aside as a deposit the lower the interest rate you will pay on your mortgage as you are a lower risk to lenders. You may be able to get help from your parents or family or consider buying a property with a friend or two.

The amount you can borrow with a mortgage depends on how much you earn and how much your regular outgoings are each month as lenders need to make sure you can afford the repayments now and in the future if interest rates went up. As a rough guide, you can normally borrow around 2 to 4 ½ times your annual income as a mortgage. This figure added to your deposit will give you the maximum amount you can pay for your new property.

Help to save a deposit

The Help to Buy ISA was a government scheme to help first-time buyers purchase a property. You could put a maximum of £12,000 over five years plus interest into a Help to Buy ISA, and the government would boost your savings by £3,000 when you buy a property. Help to Buy ISAs were only available until 30 November 2019.

The Lifetime ISA is a new type of ISA that launched in April 2017. It lets anyone who is aged 18 to 40 save £4,000 per year, and the government will add £1,000 per year until you are 50. Any money you put into a lifetime ISA will contribute to your annual ISA allowance. Money invested into a Lifetime ISA can be used to buy your first home, or accessed tax-free when you reach 60.

Remortgages

If you already have a mortgage, it makes sense to check if you could get a better deal moving to a new deal or a new lender. It’s also sensible to check that you will have paid off the mortgage by the time you retire. If you are on an interest-only mortgage, your monthly repayments only cover the interest, so at the end of the mortgage, you will still owe the same amount you borrowed at the start. If you have an interest-only mortgage, you should be saving money each month in a long-term savings plan, or investment to use to pay it off.

Fixed rate deal

The benefit of a fixed rate deal is that the interest rate won’t change for a set period of time, say, two to 5 years. This gives you certainty over how much you will have to pay each month for a period of time. If interest rates rise, you are protected, and your monthly repayments won’t change.

Tracker deal

You may get a lower interest rate with a tracker deal that moves in line with changes to the Bank of England Base Rate.

SVR

If you are paying the standard variable interest rate on a mortgage, then you should look to see if you could get a better deal elsewhere.

Buy-to-let

In recent years the buy-to-let property market has boomed with people borrowing money to buy properties to rent out. If you want to purchase a property to rent out, you need a particular type of mortgage called a buy-to-let mortgage. With a buy-to-let mortgage how much you can borrow depends more on the rent you can charge for the property than your income. However, you still need to be able to show you can afford to make the repayments, even if interest rates rise.

Offset

With an offset mortgage instead of earning money on your savings you use them to reduce the size of your mortgage, and as a result, you pay less interest and may be able to pay off the mortgage debt earlier. The other benefit is that you can access your savings when you want. If you simply used your savings to reduce the size of your mortgage, you would have to apply to the lender to borrow the money back again. Interest rates for offset mortgages tend to be higher than standard mortgages but could be an option especially if you have money in savings.

Secured loans

If you have a mortgage already you could borrow money against it using a secured loan. Borrowing money in this way is riskier than using an unsecured loan because with a secured loan you risk losing your property if you are unable to make the loan repayments. Secured loan interest rates tend to be higher than unsecured loan rates, and unlike unsecured loans, interest rates on secured loans are not fixed. This means that your secured loan repayments could increase in future. You can borrow more with a secured loan than an unsecured loan.

How to shop around

Use a mortgage broker or comparison site to help you choose the right mortgage.