The cost of a mortgage, in terms of the monthly repayments and the overall amount paid, will be determined by the amount borrowed, the term of the mortgage and the interest rates charged. The more you borrow the more you’ll repay eventually, but a longer term mortgage could still lead to lower monthly repayments than a lower amount borrowed over a shorter term.
The majority of mortgages are arranged on a repayment basis. This means that each monthly repayment consists of an amount paid off the amount borrowed and an amount on top made up of interest charged. In some cases the mortgage is interest only. This means that the monthly repayment is lower as it only covers the interest charged on the debt, rather than the debt itself. With a mortgage of this kind money is placed in an investment plan timed to mature when the mortgage term ends, the idea being that the money generated by the investment would be enough to clear the outstanding mortgage amount. There is a risk, however, that the investment in question would not be sufficient to clear the amount owed on the mortgage, and for this reason the majority of lenders prefer the certainty of repayment mortgages.
Mortgage lenders compete in a marketplace in which competition for business is driven mainly by offering low interest rates. The rate offered by lenders will be one of the following:
- Variable, which means that it can be shifted up or down in response to the Bank of England’s base rate
- Fixed, which means that it can’t be changed for a specific period of time – usually two to five years
- Capped, which means that it is variable but can’t rise above a specific level
- Tracker, which means that the rate follows another rate, usually the base rate. A tracker rate might be described as ‘base rate plus 1%’, which means that the interest charged will always be the base rate with another 1% added.
Fixed rate mortgages tend to be the most popular, but you need to be aware that when the fixed rate period comes to an end you’ll be shifted onto the lender’s variable rate unless you’ve sought out another deal, and this will usually be more expensive.
Although the interest rate is often the deciding factor when choosing a mortgage product, there are other things to take into account. The range of fees and charges vary across different deals, so you need to make sure that the additional costs are not so high that they outweigh or eat into the benefit of the lower interest rate.
Another decision to be made is the term of the mortgage, i.e. how long you’ll spend paying it off. Previously, the majority of people took out mortgages with 25 year terms, but 30 or 35 year terms have become more popular with first time-buyers having to cope with rising house prices. Online mortgage calculators can be used to calculate monthly repayments on the basis of the amount being borrowed, the mortgage term and the interest rate charged.
Other key considerations when it comes to mortgages include:
- Mortgage Deposit – generally, you’ll need to save a deposit of at least 5% of the value of the property you want to purchase. A house with a value of £300,000, for example, and a 95% mortgage would mean you need to put down a deposit of £15,000, with the remaining £285,000 borrowed in the form of the mortgage. If you can possibly save a deposit of more than 5% then it may mean that you can apply for a mortgage with a lower interest rate.
For first time buyers, saving into a lifetime ISA means that you receive a 25% top up on your savings from the government, up to a value of £1,000 a year.
- Borrowing – the amount you borrow from a mortgage provider will vary depending upon factors such as your income, your credit score and the size of deposit you’re able to save. If you’re buying a property jointly with another person then their financial details will also be taken into account. As a general rule, a bank or a building society will offer a maximum mortgage of approximately 4.5 times your annual salary but this is just a ballpark figure and will vary according to the policies of the lender, the size of your deposit and details of your financial circumstances. When you’re calculating how much you need or can afford to borrow you’ll also need to factor in expenses such as surveys, conveyancing and stamp duty. The amount of stamp duty you need to pay will vary depending upon the cost of the property and whether you are a first-time buyer.