Choosing a mortgage
When shopping around for a mortgage, it's important to get good advice. Financial advisers often give this free. Check how independent they are, and make sure they're signed up to the Mortgage Code. Think about your financial situation in advance and prepare some key questions to ask the adviser.
Many companies now sell mortgages direct, over the telephone or the internet. This may seem time-saving, but you may not get advice about what is suitable for your needs.
There are many different lenders and types of mortgage. It's worth shopping around, checking what's on offer from:
- lenders such as banks or building societies,
- mortgage intermediaries or brokers (such as a financial adviser or an estate agent) who arrange deals with lenders,
- the builder or property developer, if it's a new house.
It's best to contact several different sources and make comparisons. The internet can be a good place to compare mortgages.
Many lender and intermediary websites have calculators to help you work out how much a mortgage would cost. However, you won't be able to ask questions and check details as easily as you could face-to-face or over the phone.
Make sure you get good advice
Make sure your mortgage adviser understands your medium and long-term plans. Sometimes people end up with a mortgage which isn't as cheap or as flexible as they could have got.
Read the small print on any mortgage literature or advertisement - sometimes what looks like a good deal may have a catch. It's a good idea to have some direct questions ready
Things to check with your mortgage adviser
Make sure the person you speak to:
- understands your medium and long term needs (for example, do you expect to move again quite soon?)
- spells out the pros and cons of repayment mortgages and interest-only mortgages
- explains any redemption penalties you'll have to pay if you switch to a better deal early on in your mortgage, or pay off your loan early
- spells out any commitments linked to what looks like a good deal(such as expensive insurance)
- explains what would happen if you run into difficulties keeping up your monthly payments
- gives you a written statement of all the upfront payments involved.
Check who's advising you
Not all mortgage advice is impartial. Some advisers are tied to just one company's products, or work on commission. You may not always get full or independent advice. An adviser should disclose any commission they would get from arranging a mortgage for you.
You're more likely to get impartial advice if you pay a fee to a broker or independent financial adviser (IFA), than if you go to one who works on commission. If you pay a fee it will typically be about 0.5% of the amount you borrow, though it might be up to 1% in complex or urgent cases.
As long as your needs are straightforward and you're prepared to contact two or three 'free' advisers and compare the deals they offer, you'll generally end up with all you need to know without paying a fee.
The Mortgage Code
The Mortgage Code is a code of practice drawn up by the Council of Mortgage Lenders covering mortgage advice and service. Although the code is voluntary, all consumer mortgage lenders have signed up to it and only deal with brokers or advisers who also sign up. For a copy of the code:
- ask your lender or broker,
- contact the Council of Mortgage Lender,
- contact the Mortgage Code Compliance Board.
How much will you want to borrow?
Many lenders won't lend more than 90 or 95% of the purchase price. If you need to borrow 90% or more, you may have to take out mortgage indemnity guarantee insurance. This could cost several hundred pounds.
When working out how much you can afford to pay as a deposit, don't overlook the other upfront costs of buying such as:
- solicitor's fees - you can save money if your solicitor who is doing the legal work in buying the property can act for both you and the lender in processing the mortgage,
- the lender's valuatio,
- a full structural surve,
- an arrangement fee to the mortgage broker or lender, typically £200 to £300,
- building insurance from the time you exchange contracts,
- stamp duty on properties over £125,000,
- moving costs.
Choose your repayment option
Some mortgage deals are slightly more risky than others and you could end up still owing money at the end of your mortgage term. Interest-only loans depend on an investment plan such as an Individual Savings Account (ISA) to pay off the capital sum you borrowed, and the income from this may not be guaranteed.
Some people who took out endowment mortgage plans in the past are now finding they will have to make extra top-up payments to cover the loan. A repayment mortgage carries the least risk because provided you keep up the repayments your mortgage will always be paid off by the end of the term.
Check how interest is calculated
A lender's basic mortgage will usually be at what's called the standard variable rate of interest (or SVR) which goes up and down as bank interest rates change. It is not always easy to compare rates of different lenders, but the annual percentage rate (APR) must always be shown in advertisements or leaflets and makes comparing mortgage deals easier. The APR includes any fees or other costs charged by the lender.
Many lenders offer cheaper rates or special deals for the early years of your mortgage. The deal you choose will affect if and when the interest rate on your loan can go up or down.
Look for a lender which calculates the interest daily or monthly rather than annually. Over a 25-year mortgage term, this could save you several thousand pounds. It also makes it easier to vary your monthly payments. 'Interest rate options' has more information on the range of interest rate options.
Check for penalties
You may have to pay a redemption penalty if you switch to a better deal or a different lender in the first few years of your mortgage, or pay off your loan early. Cheap-rate mortgages, which look good value ,often have penalty clauses like this, which could mean paying back all the savings you received from a special deal.
Check how long you would be locked into a deal before you could switch without paying a penalty. You may want to avoid deals with extended redemption penalties, which lock you into the lender's standard variable rate even after the initial cheap rate deal has expired.
If you think you'll want to switch lenders or pay off additional lump sums early on, it may be best to avoid special deals and go for a mortgage at the standard variable rate.
CAT standards are government standards for mortgages. CAT is short for:
CAT standard mortgages should ensure a reasonable-value mortgage with no hidden charges or terms. You can also use them to assess the pros and cons of a non-CAT mortgage. Non-CAT mortgages are not necessarily worse than CAT mortgages
Having a CAT standard mortgage should mean:
- no fees are payable to a broker who gets you a mortgage,
- interest is calculated daily and you can choose which day of the month to pay,
- there is no separate charge for a mortgage indemnity guarantee,
- you don't have to buy any other financial product to get one,
- there is no penalty for early repayments,
- there is no redemption penalty once the initial cheap or fixed-rate deal has ended,
- you won't be charged a higher rate of interest if you get behind with payments,
- you can continue with your existing mortgage if you move home provided the lender approves the new property.
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