Mortgages

5 questions to ask before applying for a mortgage

By
Zoopla

Haven't moved home in a while? Signing up to a new mortgage is a major financial decision. So, before you take the plunge, consider these 5 questions.

Mortgage rates have been super-low for years now. And, whether you’re a homeowner or first-time buyer, that has to be a good thing.

That said, mortgages won’t be cheap forever. And what’s more, there’s lot more to think about than just the rate you see advertised. But if you ask yourself these five questions first, you won't go too far wrong.

1. "Can I afford for my mortgage payments to go up?"

Mortgages come in various forms. If you opt for a tracker or a discount mortgage, the interest rate – and therefore your monthly payment – could rise at any time.

If there’s slack in your budget for an increase in repayments (or you just don’t want to risk the prospect), plump for a fixed rate mortgage. It does what it says on the tin: the rate remains unchanged.

And, even if it's not the cheapest deal on the market, you get both peace of mind and the chance to budget.

2. "What fee does the mortgage charge?"

Some of the very cheapest mortgage rates come with a catch in the form of a hefty ‘arrangement’ fee charged by the lender for setting up the deal. So, make sure you look beyond the 'headline interest rate' and factor this fee into the overal cost of the loan. Do it like this:

  • Input the interest rate, loan amount and repayment term into any online mortgage calculator to get a monthly repayment figure
  • Multiply this figure by the number of months in the deal 
  • Add on the arrangement fee
  • Now you have a total overall cost of the loan, you can do the same for all deals.

Bear in mind that arrangement fees become more significant on shorter-term deals. For example, a £2,000 fee on a 2-year fixed-rate mortgage works out at £1,000 a year. But on a 5-year deal, it’s only £400 a year.

Could you get a better mortgage deal?

Check if you could get lower rates, smaller fees and better customer service before you commit. You can compare thousands of different mortgages* suitable for remortgaging or first time buyers with Zoopla's partner uSwitch.

First time buyer Home mover

3. "Can I leave by paying it off early?"

If you sign up to a specific mortgage deal you could have to pay an Early Repayment Charge (ERC) if you want to pay off the loan before the end of the agreed term.

Even if you just want to pay a little extra – with a bonus or inheritance, for example – most lenders limit ERC-free overpayments to 10% of the outstanding mortgage balance each year.

ERCs are usually calculated as a percentage (between 1% and 5% is typical) of the outstanding balance.

Often, they are ‘tiered’ which means the amount you pay decreases with each year of the deal. So, for example, it would be more expensive to leave in year 2 of a 5-year fix than it would in year 4.

Think about the future before shackling yourself to a mortgage with restrictive or lengthy tie-ins. Or opt for a mortgage that doesn’t have any, such as a standard variable rate or a flexible deal.

4. "Should I use my savings?"

If you are a first-time buyer, you’ll have probably exhausted your savings pot already in deposit and fees.

If you’ve been a homeowner for some time though, you may have had a chance to build it up again.

Ask yourself if it’s worth using this cash to reduce your mortgage balance. (You’ll have the chance to do this if you’re remortgaging, or your current deal is flexible and allows unlimited overpayments.)

The answer will depend on whether the amount of interest you are paying on your mortgage is greater than the interest you’re earning on your savings.

Don’t forget that, since April 2016, the personal savings allowance gives basic-rate taxpayers the chance to earn the first £1,000 of interest tax-free (£500 for higher-rate taxpayers) even in a standard savings or current account. You also have a tax-free ISA alowance of £20,000 for the current tax year (2017/2018).

Could you get a better mortgage deal?

Check if you could get lower rates, smaller fees and better customer service before you commit. You can compare thousands of different mortgages* suitable for remortgaging or first time buyers with Zoopla's partner uSwitch.

First time buyer Home mover

5. "Have I done enough research?"

While no one can predict the future, you can make the right decision based on your circumstances at the time, so make sure you have a good look at the mortgage deals on offer first.

If you’re self-employed or your credit score isn’t up to scratch, contact an independent fee-free mortgage broker for advice. 

Research extends to familiarising yourself with your own credit score too. The first step is to apply for a copy of yours. If you find it's not up to scratch, here are some steps you can take to improve it.

Could you get a better mortgage deal?

Check if you could get lower rates, smaller fees and better customer service before you commit. You can compare thousands of different mortgages* suitable for remortgaging or first time buyers with Zoopla's partner uSwitch.

First time buyer Home mover

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