10 things you need to know about mortgages
Monthly mortgage payments are the biggest regular outgoing for many people so it is really important to have the right home loan, otherwise you could end up paying thousands of pounds more than you need.
However, if you are baffled by mortgages and don't know where to start, working out which deal to go for can be hard. So here are 10 things worth knowing…
1. Your mortgage rate could change even if there's no change in the Bank of England base rate
If you are one of the 5.6 million households paying your lender's standard variable rate (SVR), it is worth considering switching on to another mortgage.
The SVR is set by the lender and is not directly linked to the Bank of England base rate. Changes to the SVR are therefore at the lender's discretion.
We have recently been reminded about this because even though the Bank of England rate has remained unchanged at 0.50% since March 2009, a number of lenders have announced increases to their SVR.
Halifax, Bank of Ireland, Yorkshire Bank and Clydesdale Bank are all be hiking their SVRs over the coming months. Around 1 million borrowers will be affected and will see their mortgage payments go up as a result.
Other lenders could follow suit so it could be worth remortgaging onto a tracker or fixed mortgage if you are currently paying the SVR.
2. There is a difference between trackers and discounts
If you are looking for a new mortgage and are happy to go for a variable rate deal, it is important to appreciate the difference between trackers and discounts.
Discounted mortgage rates are linked to the lender's SVR, while trackers are directly linked to the Bank of England base rate.
Trackers are therefore more transparent than discounts because you know that any rate changes will mirror changes to the base rate. As the imminent SVR increases highlight, this is not always the case with discounted mortgages.
3. Fixing your mortgage protects against future rate rises
Fixed mortgage rates tend to be higher than those on variable rate products. However, if the thought of higher mortgage payments worries you, it is worth opting for a fixed rate for peace of mind.
And if interest rates do rise during the fixed term, you may find it proves a cheaper option because the rates on variable trackers and discounts will obviously rise.
4. Think carefully about how long you lock in for
If you opt for a fixed rate or a mortgage with an initial low tracker or discounted rate, an early redemption charge (ERC) usually applies for the duration of the introductory period. This means that if you need to get out of the mortgage during that time you will be charged a penalty and it could be thousands of pounds, so bear this in mind when deciding which mortgage to go for.
5. Lifetime trackers are very flexible
If you do not want to be tied into your mortgage, it is worth looking at lifetime trackers (also referred to as term trackers) as the majority are penalty free. As a result, if your circumstances change you can get out of the mortgage without being charged a fortune.
Check the small print before you apply, although a few providers, such as Woolwich, do apply an ERC during the first few years of the deal.
6. The lowest rate won't necessarily be the best value
Set-up costs have a big impact on the cost of your mortgage – some can be as high as £2,000. So when you're comparing mortgage products it is really important that you factor in the fee and work out the total cost over the term of the deal and don't just base your decision on the interest rate.
It may be cheaper to opt for a higher rate of interest in return for a lower application fee. This will depend on how much you are looking to borrow.
You can work the total cost out using an online mortgage calculator. You need to multiply your monthly payments by the length of the mortgage term. For example, with a two-year fixed rate mortgage, you multiply the monthly payment by 24 and then add on the arrangement fee.
7. Save as much of a deposit as you can
The most competitive mortgage deals are restricted to those with sizeable deposits. You really need to have at least 25% to put down. This does not mean you won't be able to get a mortgage if you have a smaller deposit, but you will pay a higher rate of interest.
Therefore, it is worth scraping together the biggest deposit you can. This will also give you a bigger buffer in case property prices fall, as you will own a larger stake of your home. And your monthly mortgage payments will be lower because you are borrowing a smaller amount.
8. Repayment versus interest only
There are two types of mortgage: interest-only and capital repayment. With an interest-only loan, as the name suggests, your monthly payments only cover the interest on your mortgage.
You should have a repayment plan running alongside, so that when the term of the mortgage ends you have saved enough to clear the debt.
Historically, endowments were commonly used for this purpose although ISAs have become more popular recently. There is a risk that there will be a shortfall and that your investment won't be worth enough to pay off the mortgage.
With a capital repayment mortgage, as well as repaying the interest each month you also pay off some of the capital you borrowed. Monthly repayments are calculated to ensure that your entire debt is repaid by the end of the mortgage term.
Lenders have clamped down on the availability of interest-only loans because of concerns that many of those with them don't have a repayment plan set up. There are fears of a mortgage time bomb, which could explode when the terms of these loans end and the borrowers have no means by which to pay off their outstanding mortgage.
If you have an interest-only mortgage and are worried about how you'll pay the loan off, it is worth switching it to a repayment loan.
9. Try and make overpayments
Many of us dream of being mortgage-free and one way of making this a reality is to make overpayments so your debt will be paid off more quickly. Most mortgage deals allow overpayments. There is usually a cap though. Often the maximum you can pay off is 10% of the outstanding capital each year.
If you have a penalty-free or fully flexible mortgage, such as a lifetime tracker, unlimited overpayments are allowed.
10. There are options if you are struggling to keep up with repayments
If you are finding it difficult pay your mortgage, speak to your lender as soon as possible. If you fall behind with repayments, your home may be repossessed, but this is a last resort for lenders.
Mortgage providers will try to help borrowers who are struggling. Options that may be available include payment holidays or a temporary reduction in monthly payments. However, the longer you leave it, the greater the risk that you will lose your home.
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