We caught up with specialist mortgage brokers to gain an insight into what really look for when applying for a mortgage. There are so many different rates and mortgage types, so how do you choose what’s right for you? Let’s take a look below.
- Mortgage type
A mortgage will either be an interest only mortgage or a repayment mortgage. But what do the two types mean and how do they differ?
An interest only mortgage is where the borrower is simply paying the interest on the loan and not the actual mortgage itself. This is only used for investment properties such as buy to let mortgages and can no longer be used for residential purchases. For example, if you’re buying a home for yourself to live in, it needs to be a repayment mortgage as interest only mortgages aren’t allowed.
The reason for this is that interest only mortgages only clear the interest amounts. Towards the end of the mortgage term, the homeowner will usually sell the property to clear the balance of the mortgage.
This isn’t good news if you actually live in the home yourself, as if you need to sell the home to clear the balance, you could end up homeless. This is why interest only mortgages on home purchases aren’t allowed anymore.
Interest only mortgages are beneficial for investors as the mortgage payments each month are a lot lower than residential mortgages. The difference in rent can generate a tidy profit. The downfall here is that you’ll have to sell the property towards the end of the term.
Repayment mortgages are commonly used for homeowner occupiers and rarely used by investors. Monthly payments are higher than interest only mortgages, but this is because you’re paying towards the balance of your loan and will eventually own your property outright if you meet all of the payments.
- Mortgage term
The term of your mortgage is simply the length of your mortgage.
Mortgages tend to be 20, 25 or 30 years. They can of course be shorter and longer in terms of duration. Most mortgages will also have introductory periods of either 2, 3 or 5 years. This is for both interest only and repayment mortgages. Introductory periods will have lower interest rates for the duration of the introductory period and then will revert to a higher rate once the introductory period expires. Many borrowers then look to remortgage in order to take another mortgage on so that their rates stay low for longer, saving money.
The longer the term of the mortgage is, the lower the monthly payments tend to be. That said, because you’re paying off the mortgage over a longer time period, you’ll also end up paying more overall. You’ll need to see what you can manage from month to month and what works for you financially. Ultimately, longer mortgage durations will result in more being paid, however it may be more manageable from a financial perspective.
- Mortgage fees
Many people quickly rush to the lowest mortgage rates, but this isn’t always a smart move. Many mortgages have slightly higher rates but may have free survey and free or low arrangement fees. If you look at the figures, a slightly higher rate with no fees could actually save you money.
You also need to check other fees such as early redemption charges.
Early redemption charges are fees which are charged to borrowers when they end the mortgage earlier than anticipated. Always check these beforehand as they can run into the thousands.
Number crunching isn’t something that you’d want to perhaps do, as it can be a lengthy procedure, especially with thousands of deals to choose from.
You can enlist the services of mortgage brokers. They do charge small fees, however their expertise can save you money overall. Brokers can also look at the entire market and find you the most cost effective deals across the country. Also if you have bad credit or are struggling to get a mortgage from a high street lender for other reasons, brokers have the expertise to speak to underwriters on your behalf to iron out any concerns from lenders.