A mortgage is probably the biggest financial commitment you’ll ever make. Make sure you get it right by asking yourself these 5 questions before making your application.
Homeowners have become accustomed to super-cheap interest rates. The Bank of England base rate hit an unprecedented low of 0.5% all the way back in March 2009. And, in August this year (immediately post-Brexit), it fell again to a miniscule 0.25%.
Cheap mortgages are clearly good news for both first-time buyers and existing homeowners looking for the next best deal.
But there’s a few points to note here.
Firstly, mortgages won’t be cheap forever. In fact, some lenders, such as HSBC, have already started to peg up the cost of their fixed rate deals.
Secondly, there’s a lot more to think about than just the rate you see advertised. So, here are 5 questions to ask yourself before signing on the dotted line.
1. Can I afford for my mortgage payments to go up?
There are various types of mortgage. And some – such as trackers, and discounts – mean your interest rate, and therefore monthly payments, could go up at any time.
If there’s no room in your budget for a rise in repayments, or you simply don’t want to worry about it, go for a fixed rate mortgage – even if it starts out a little more expensive.
2. What arrangement fee does the mortgage charge?
Some of the very cheapest mortgage rates come with ‘a catch’ – the lender will charge a big arrangement fee to set up the deal. Make sure you factor the cost of this fee into the loan rate. This is a quick way to do it:
- Find out the monthly cost of the mortgage by entering the interest rate alongside the amount you want to borrow into an online mortgage calculator (taking note if it’s repayment or interest-only).
- When you have the monthly cost, multiply it by the number of months in the term – for example a two-year fixed rate would be 24 months and a five-year fixed rate would be 60.
- Add on the stated mortgage fee and you have the true overall cost of the mortgage.
- Do the same again for different deals.
Bear in mind arrangement fees become more significant on shorter-term loans as they work out at a higher cost per year.
3. Am I free to leave or even overpay?
If you sign up to a specific mortgage deal, you’ll have to pay early repayment charges (ERCs) if you want to redeem the loan before the end of the term.
In fact, even if you just wanted to overpay – with an inheritance or bonus for example – most lenders will cap this at 10% each year before ERCs kick in.
ERCs are usually charged a percentage of the outstanding borrowing. Often this percentage decreases with each year of the deal (in other words, it would be more expensive to leave in year two of a five-year fix than it would in year four).
Think carefully about your plans before tying yourself into a mortgage with restrictive or long tie-ins.
Alternatively, some mortgages, such as some lifetime trackers and or those priced on the lender's SVR, don't come with tie-ins (and therefore ERCs) at all.
4. Should I use my savings?
If you are a first-time buyer, chances are you will have exhausted your savings in your quest to raise a deposit and meet the plethora of homebuying fees.
But if you’ve been a homeowner with a mortgage for a while, you may have built up your savings pot again.
When it comes to switching deals, rather than keeping these savings in a low-interest account, it could make more sense to use them to reduce the amount of your mortgage.
That’s because the lower you can drive down your loan to value (the percentage of the house value that is mortgaged), the cheaper your rate will be. You can find out more about loan to values here. Always do your sums!
5. Have I done enough research?
It’s impossible to predict the future, but at least you can make the right decision based on your circumstances at the time – and this is never truer than when it comes to getting the right mortgage.
Make sure you fully research the current mortgage market using comparison websites like uSwitch.com. If you need further help or have specific needs – you are self-employed or your credit score isn’t up to scratch for example – contact an independent fee-free mortgage broker for advice.
Do you have any of your own tips for a successful mortgage application? Share them by posting in the comments below...