A Guide To Finding The Right Mortgage For You

When buying a new home, one of the most important steps is of course applying for a mortgage. However with so many mortgage offers and types to choose from, you’ll need to consider which options best suit your situation. 

It would be beneficial to appoint a financial advisor to help guide you through the mortgage search and application process, however to get you started here are some of the products you’ll be presented with and what you’ll need to consider when making a decision.

Types of mortgage: Interest-only V repayment mortgage

There are two types of mortgages that you will be faced with; interest-only or repayment mortgage. The type you choose will impact how you pay off monthly on your home loan.

   Interest-only mortgage

An interest-only mortgage means the amount you repay every month is only covering the interest on the mortgage, not capital. This would mean that you will need to save money elsewhere to eventually pay back the amount you borrowed.

•    Repayment mortgage

A repayment mortgage, sometimes called a ‘capital and interest mortgage’, means your monthly payments include the monthly interest AND some of the capital. This means that by the end of your mortgage term, you will have paid off the full amount you originally borrowed including interest. It can also make you eligible for more competitive deals when you come to choose another mortgage product in the future.

The different mortgage products

Once you have decided on the mortgage type, you will also need to consider the type of product that’s right for you. There are typically five different mortgage products.

•    Fixed rate

A fixed rate mortgage is exactly what it sounds like – the interest rate of your mortgage will remain the same throughout the product term. This is one of the most popular options as it means your monthly payment won’t fluctuate throughout the loan, making budgeting easier. However, bear in mind if interest rates fall, your repayments won’t. Mortgage Bureau’s Lee Cardwell, an independent mortgage advisor to Strata customers, explains why fixed-rate mortgages are so popular right now. “We have already seen an increase in the Bank of England base rate from 0.25% to 0.5% and people are expecting it to only get higher, so they are fixing while rates are good,” Lee says. “Most fixed-rate products last two to five years, although many first-time buyers are going for five-year loans because they are using the Help to Buy scheme.”

•    Variable rate

Another mortgage product to consider is variable rate. This means your interest rate can change throughout the product term based on the standard variable rate set by your mortgage provider and therefore, so would your monthly repayments. 
The main advantage of variable rate mortgages is that when the interest rates fall, then your repayments are reduced in line with this. But what this also means is that when interest rates rise, your mortgage repayments do the same, meaning you could end up paying out more than you originally expected. 

•    Tracker rate

Similar to variable rate mortgages, tracker rate mortgages fluctuate in line with the monthly changes to the Bank of England base rate. The main advantage of this is that when the base rate falls, so does the interest you pay. However, like with variable mortgages, there is a danger that you could end up paying more each month if the Bank of England base rate rises.

•    Standard variable rate (SVR)

All mortgage lenders offer a standard variable rate product based on the normal rate of interest that they would charge. If you don’t choose another mortgage product when your current product’s term is coming to an end, you will typically be moved onto a standard variable rate mortgage.  As with the tracker and variable mortgages, the interest rate you pay is determined by the Bank of England base rate.

•    Discount

Some mortgage lenders may choose to offer a discount mortgage, which means they reduce the interest rate that is normally charge on their SVR mortgage product. This will typically be a fixed term deal, the length of which is determined by your mortgage provider.

Weighing up the fees and charges

With some mortgages there will be associated fees and charges that you will need to consider when you apply as these could impact your monthly budget for living in your new property. 

Using a mortgage broker or financial advisor will mean that you incur a fee for their services. This fee can either be a set amount or a percentage of the amount you borrow from the lender. Consider this cost before you enlist their services as this may eat away at your deposit or savings for other associated home buying costs. When buying a new home with Strata, you won’t need to pay anything to use one of their recommended mortgage advisors. 

A common charge you’re likely to come across is an arrangement fee. This is charged by your mortgage lender and can usually either be added to the term of your mortgage, which will increase your monthly repayments, or paid upfront. 

Calculating the benefits of the mortgage and taking into account any associated fees and charges is essential to choosing the right mortgage for you. Your independent mortgage advisor can run through your options and help you to calculate the cost of the mortgage in the long run, helping you to find the right mortgage for you. 

This article was kindly provided by Strata, and whilst we've got you here, why not take a look at the fantastic new homes available by Strata here

Publish date: 05/06/2018

Publisher: New Home Finder

Url: https://www.newhomefinder.co.uk/new-home-info/finance-legal/a-guide-to-finding-the-right-mortgage-for-you