When you’re buying a property, working out which mortgage is best for you is a big decision. For many people, the main thing they look for is the interest rate, as this will play a big part in determining how big the monthly repayment will be.
But there’s far more to working out which mortgage you should go for than simply finding the deal with the lowest interest rate.
So what else do you need to take into account when considering whether a mortgage is the right one for you?
Long-term vs short-term
Most borrowers go for a fixed rate mortgage. That makes sense, as you have some certainty over precisely what your monthly repayments will be for the duration of the fixed term. So if you go for a two-year fixed rate, your repayments are set in stone for two years, while a five-year fixed rate gives you that certainty for a full five years.
That added certainty comes with a cost though, as the interest rates on five-year fixes will be higher than those on two-year deals. While this means your repayments will be more expensive, this may be a price worth paying if you value the added peace of mind, knowing that your repayments won’t charge for a five-year period, irrespective of what happens to the base rate in that time.
The lowest interest rates around will be on variable mortgage deals. While these are cheaper initially, the rate - and therefore your monthly repayment - will go up as the base rate increases. As such, you may end up paying more over the long term.
The product fee
Most mortgages will come with a product fee, though some lenders prefer to call it an arrangement or booking fee.
This is a fee that you need to pay in order to secure the product that you are applying for, and is typically around £1,000. You can pay it up front or add it to your mortgage balance. Be warned, doing so means that you will be charged interest on it at the same rate as your mortgage so it will end up costing you far more in the long run.
The mortgage deals with the lowest interest rates also generally come with the highest arrangement fees. However, you can find deals with a slightly higher interest rate but which charge a small arrangement fee, or even no fee at all.
It’s important to do your sums to work out exactly how much each deal will cost you - it may work out cheaper to go for a mortgage with a higher interest rate, as you’ll avoid having to pay a product fee.
Some mortgage lenders offer deals that reward borrowers with cashback once the property sale goes through, from £500 up to £1,500. This money can prove invaluable, particularly for first-time buyers who want to purchase furniture or decorate the property but may not have the cash at hand after the various added expenses that come with purchasing a property.
However, these deals tend to come with slightly higher interest rates. So again, borrowers will need to work out whether they are better off with a lower rate but no money with which to decorate, or slightly higher repayments and a bit of cash with which to furnish the property.
Early repayment charges
How long are you likely to live in this property? If your circumstances change, perhaps because of your family or your job, then may need to move sooner than expected.
If you pay off your mortgage during the fixed rate term, then chances are you will be subject to an early repayment charge. This is calculated as a percentage of the balance you are paying off, so can run into the thousands.
If you are concerned that you may need to move on earlier than anticipated, it’s important to look at deals with smaller early repayment charges, even if they may come with a higher interest rate.
Getting advice vs going alone
You can compare the deals available in the mortgage market yourself if you want to find a decent deal, or you can get a mortgage broker to do it for you.
With a broker, while there will be a fee to pay for their advice, they should be able to find the right deal for your circumstances and will have access to some lenders that don’t deal with borrowers directly.