What is a mortgage?
A mortgage is a loan you get when you buy a house that allows you to cover the full amount without having immediate cash to do so. You borrow against the cost of the house and pay it back (with interest) over a set number of years.
For most people, a mortgage will be the biggest loan they ever take out, so it’s definitely serious business. You can acquire one from a bank or a broker, and there are such a wide array of choices it makes sense to be armed with all the information before you start looking.
When should I apply for a mortgage?
The best time to arrange your mortgage is before you’ve even found a house. It may sound strange, but it is actually the most important part of finding your brand new place. Ideally, when you go to view homes, you want to show the estate agent have a pre-approval, which means a lender has already shown that they’re prepared to give you finance. This lets agents know you’re serious about purchasing and enhances your buying power. Most pre-approvals last around 90 days, so you will have to go back to your bank or broker if you don’t find your perfect pad in that time.
What types of mortgage are there?
There are two main mortgage types; fixed rate and variable. Within these are a few different categories too:
Central interest rate
The central bank interest rate is used by the bank of England to control monetary policy. Put plainly, it is the rate at which banks can borrow money from the central bank, so it affects everything from mortgages to savings.
This type of mortgage has a set rate of interest that won’t change for the set length of the loan (usually two, five or ten years). Sometimes you can get a better deal on these, but of course, it’s all dependent on what the Bank of England’s central interest rate is set at. Essentially, if that rate falls, you won’t see any benefit in lower repayments. Also, once your fixed period ends, you’ll be put onto your lender’s standard variable rate which may be much higher than your original rate.
However, many people feel safer in the knowledge that they have guaranteed monthly payments that help them stay on budget. As with any financial deal, it’s best to shop around and see what works for you.
Variable rate mortgages can vary throughout the duration of your loan. Some types include:
Standard variable rate
Each bank or lender has a standard rate that they charge, which can go up or down based on the Bank of England’s central interest rate. For some people, this is a good option as it gives you the freedom to overpay, and you might get a good deal depending on the economy at the time. But, for others, the uncertainty of rates changing makes it not the best fit.
Trackers are usually directly linked to the central rate of interest set by the Bank of England, so can be cost-effective when it is low. They are usually a short term option, but you can find offers that last the length of your loan.
With variable mortgages, you will likely see various deals, from discounts in the first few years to lenders offering caps on the amount of interest paid. While these deals can be a great way to save, ensure you’re not tied into anything that will be more expensive over the long-term.
Which mortgage repayments are available?
This is the most common mortgage type, where you pay back the loan capital as well as the interest. So, by the end of your repayment term you’ll have paid back the whole thing. Generally, at the start of your loan you’ll only be paying back the interest, so if you move in the first few years you might notice that very little of your balance has been paid off.
As a cheaper option for monthly repayments, some people choose interest-only. This means you don’t repay the capital on the loan, but for a fixed term just pay back the interest owed. This is good for those who know they’ll be selling their home in a short period of time, or people who are expecting to earn more or get a big lump sum to pay off the loan at a later date, but should be carefully considered as it will take much longer to settle your mortgage.
To help give you and your loved ones piece of mind, a life insurance plan can cover mortgage payments if the worst was to happen.
What is a credit score?
Something that can affect your chances of getting a mortgage is your credit score. Learn more about this here.
How to discuss finances with your partner
If you're a cohabitee who wants to streamline your joint finances, check out our handy guide to communication and money.