What to Look for in a Mortgage
While the lenders will be scrutinising borrowers, those who are looking to borrow also need to make sure that they scrutinise the mortgages that they are going to buy into.
Most obviously, the amount that will need to be paid back, and the interest rate charged on that are significant factors to consider. Yet there are some other important factors to look out for when shopping around for your mortgage.
Make sure to check these things when searching for a suitable mortgage deal.
Loan-to-value and deposits
You need to get the right ratio of loan-to-value for your situation. If you have a large amount of savings and can afford a big deposit, you can normally get a lower loan-to-value.
Generally, this will help to bring down the interest rates, so if you can afford a bigger deposit, it is usually beneficial.
Another very important aspect of searching for a mortgage is the interest that you will have to pay on the money borrowed. The lower the APR, the better.
The lower the interest rate you can get, the less you will have to spend on your mortgage over the term.
Variable or fixed interest rate
The interest charged on a variable rate mortgage can change. From month to month, it changes to reflect the base interest rate of the lender. This means some bills may be more or less expensive than others.
Because of this, it is important to save enough money as a backup to cover any increases to the bill. The flip side is that borrowers can get a pleasant surprise if any given bill costs less than expected.
Furthermore, variable interest rates tend to be cheaper than fixed interest rates.
With a fixed rate mortgage, the borrower knows in advance exactly how much each bill will cost. The interest is fixed for a certain time frame (usually a two year fixed term or a five year fixed term).
This helps with budgeting and financial planning. It also means the borrower will not be surprised by a higher than usual bill. The downside of this is that the interest rate is often higher than a variable interest rate.
After the fixed rate term, the interest rate usually changes to the variable rate of the lender.
How the interest is calculated
Interest can be calculated several ways: daily, monthly, or annually. Depending on how it is calculated, it may work out slightly cheaper or more expensive.
Discount mortgages can also help to keep the interest rate low. However, discounts on interest usually only last for a fixed term, and you need to make sure you know what the interest rate will be once the discount ends. You will need to be able to afford to pay the interest once the discount ends, or look into remortgaging. Just beware of added fees.
Mortgage term length
The length of the mortgage term is very important. Although it seems more like a long term consideration, the length can alter the amount that has to be paid on each individual payment.
The term of the mortgage sets how long it will take for the borrower to pay back the borrowed amount. The shorter the term, the larger the individual payments will have to be, but the sooner the mortgage will be paid off.
The longer the mortgage term, the cheaper each individual payment will be, but the borrower will be indebted for longer. (It also means that over the term, more interest will be paid in total.)
The flexibility of the mortgage should be taken into account.
How easy is it for you to remortgage? Can you make easy payments? How much is the interest rate going to change? Even if you want to pay some extra to reduce the term time of your mortgage, you may end up being charged for that, too.
Charges can be made on some mortgage deals if you want to change anything, and sometimes these charges can be very restrictive.
Some mortgages can even come with the option for a payment holiday, which can be an attractive extra to have on a mortgage deal.
You need to know exactly what charges could be levelled at you if you want to make any changes over the term of your mortgage.
Read the small print
No matter what kind of mortgage you are getting, you need to make sure you understand everything about it so that you can be prepared and not jeopardise your finances.
Make sure the bank has explained everything to you, and disclosed all the charges that you will have to pay in any eventuality.