Sometimes getting any mortgage deal can be a challenge. When, however, you do have a choice between different options, it’s vital that you choose the right one. Mortgages can be for such large amounts that even a small mistake can make a big difference to your finances. With that in mind, here is what you need to know.
There are five main factors you need to consider
Once you know these, you can do the sums to work out which deal is best overall for your finances and lifestyle.
The five main factors you need to consider are:
- The type of mortgage you need/want
- Any features you need/want
- The interest rate and term
- The set-up fee
- Early repayment penalties
The type of mortgage you need/want
In some instances, this will be determined by the type of purchase you want to make and/or the type of buyer you are. For example, if you want to buy a property to let out, then you will need a buy-to-let mortgage.
Assuming you want to buy a residential property, then your first choice is whether to go repayment or interest-only. Keep in mind that if you want an interest-only mortgage, you will need a realistic plan in place to pay off the loan at the end of the term.
If you go for a repayment mortgage, then you need to choose between variable-rate or fixed-rate. In principle, the cost of variable-rate mortgages can go up infinitely. Fixed-rate mortgages, by contrast, are guaranteed to cost the same for the length of the term. They may not, however, necessarily work out more affordable overall.
Any features you need/want
Would you like an offset mortgage where you sacrifice interest on your savings so that you pay less interest on your loan? Would you like the ability to take payment holidays, make overpayments or make withdrawals of money you’ve already paid? Would you like cashback?
Make a “shopping list” of features you need and want. Be very clear about which options are needs and which options are wants. Remember, any special features can add to the price of your mortgage. You, therefore, need to decide which ones are really worth the money.
The interest rate and term
You need to know both the interest rate and the term to compare mortgages fairly. The main reason for this is that the term will determine how long it will be before you need to remortgage (or go on your lender’s standard variable rate).
For example, if you take out five mortgages each with a one year term, you will have to pay five sets of fees. If, however, you take out one mortgage with a five-year term, then you will only need to pay one set of fees. That does not necessarily mean that the five-year fix will work out more affordable. You need to do your sums carefully.
The set-up fees
Some fees are likely to be the same regardless of what lender you use, for example, surveyor’s fees. You should, however, check if the lender charges any fees and factor them into your calculations. What’s more, you need to account for them accurately.
Remember, if you incorporate the fee into the mortgage amount, then you will be paying interest on it over the lifetime of the mortgage. This can work out significantly more expensive than just paying it upfront.
These might not be deal-breakers but it’s advisable to know them anyway. Life can happen, for better as well as for worse. It’s therefore a good idea to know how much it would cost you to terminate your mortgage early.