A MORTGAGE will most probably be your largest monthly expense, so it is important to get the best deal when buying a property or remortgaging.
Here is how to find the best mortgage rates.
There are two types of mortgage to choose from, a fixed rate and a tracker.[/caption]
What is a mortgage?
A mortgage is a loan that helps you buy a property.
Mortgages are offered by banks and building societies both online and offline.
You will need to put down a deposit and the lender will provide the rest.
For example, if a bank was willing to lend you 80% of the value of a property, known as the loan-to-value (LTV), you would need to stump up the remaining 20%.
As with any loan, there is interest charged on the monthly repayments.
If you fall behind on your repayments there is a risk that your home could be repossessed.
What are the different types of mortgages?
There are two main types of mortgage to choose from, a fixed rate and a tracker.
A fixed rate mortgage provides an interest rate that remains the same for an agreed period such as two, five or even 10 years.
Your monthly repayments remain the same for the whole deal period, which provides some comfort and security as you can predict what your repayments will be each month for a set number of years.
In contrast, a tracker mortgage sets your rate at a certain percentage above or below an external benchmark. This is usually the Bank of England base rate or a bank may have its own figure.
If the base rate rises your mortgage will get more expensive, but if it drops then your monthly repayments will be reduced.
This can mean your repayments are unpredictable, but it could be beneficial if you think rates will drop and you don’t want to be locked in at a high price.
There are also discount rate mortgages that set repayments based on a lender’s own interest rate, known as the standard variable rate (SVR) or capped home loans, that are linked to the SVR but won’t go above a certain level.
In both these cases your repayments can change if the SVR is moved up or down.
Some lenders may let you offset your savings against your mortgage.
This links your mortgage to your savings to reduce interest being charged on their loan.
The more savings you have, the less interest you will pay on your mortgage, which should lower your monthly repayments and help pay off the debt sooner.
It would mean having your savings with the same bank that provides your mortgage.
You may not get the best interest rate, but it may be worth it to reduce your mortgage repayments.
What mortgage do I need?
Most lenders will have a standard selection of mortgages with a range of LTVs.
The type of mortgage you need will depend on your circumstances.
Lenders offer low deposit mortgage deals aimed at first-time buyers and some may have specialist products aimed at the self-employed and older borrowers with harder to prove income.
The best mortgage interest rates usually require the largest deposits.
The Help to Buy equity loan scheme can help first-time buyers get a mortgage with a low deposit[/caption]
This can be hard if you are a first-time buyer unless you have large savings or support from family.
Property owners may be able to use some of the value in their current property as a large deposit when moving to a new home loan, known as remortgaging.
Landlords can also get buy-to-let mortgages to purchase a property they are planning to rent to tenants.
The rental payments go towards repaying the mortgage.
The government also supports mortgage schemes to help first-time buyers onto the property ladder:
Help to Buy equity loan: The government will lend you up to 20% of the value of a new-build home – or 40% in London – after you’ve put down a 5% deposit.
The loan is on top of a normal mortgage, but it can only be used to buy a new build property in England and is subject to regional house price caps.
Lifetime Isa: This is another government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home. You can save up to £4,000 a year and the Government will add 25% on top.
Shared ownership: Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount.
You can buy anything from 25% to 75% of the property, but you’re restricted to specific ones.
What are mortgage rates?
Lenders will advertise mortgages based on the amount they will lend – the LTV – and the interest charged on the loan, known as the mortgage rate.
Mortgage repayments are made up of capital and interest.
The capital is the value of the loan you are repaying.
But as with any loan, there is interest to pay.
A lender will charge an interest rate on top of the amount you borrow.
Interest must be paid each month and this is based on the mortgage rate.
Borrowers can usually only access the cheapest mortgage rates with a big deposit.
What impacts mortgage rates?
The best mortgage rates today can be determined by a range of factors.
You will often need a large deposit to access the lowest mortgage rates.
It will also depend how long you are borrowing for.
A two-year fixed rate will usually have lower interest rates than a five-year fix.
But actual pricing is influenced by the Bank of England base rate and how much it costs lenders to borrow the money on the wholesale markets.
It also depends how much competition there is in the market and how keen a lender is to attract new customers and build market share.
What’s the difference between mortgage rates and mortgage fees?
Watch out for the fees when you compare mortgage rates.
Lenders may charge an upfront fee to arrange your mortgage.
This could be called an application or product fee and could range from £100 to almost £2,000.
The cheapest mortgage rate may often come with a high fee, so it may sometimes be worth paying a slightly higher rate in return for paying less upfront.
What is APRC?
Another way of assessing the cost of a mortgage is the annual percentage rate of charge (APRC).
This illustrates the annual cost of a mortgage by combining all the fees and interest.
It can be an effective way of comparing different products as it takes account of both the rate charged and any fees.
What fees should I expect when applying for a mortgage?
A mortgage fee is just one cost to be aware of when arranging a home loan.
You may have to pay valuation fees to value your property, or to cover the legal conveyancing work.
These could cost around £500 to £1,500, according to Compare The Market.
A broker may also charge a fee for their advice if you use one to make an application.
There are lots of fees to be aware of when getting a mortgage[/caption]
Check for any exit fees or early repayment charges (ERCs) if you want to switch your mortgage before the end of the deal term.
These can be pretty steep, especially in the first years of the loan when it could be as much as 5% of the balance.
Don’t forget to account for any stamp duty and removal costs when buying a property as well.
There is currently no stamp duty for any buyers on the first £500,000 of a property purchase until the end of June 2021.
First-time buyers will then benefit from an exemption on the first £300,000 of a purchase up to a maximum property price of £500,000.
Will mortgage rates go down?
Mortgage rates can change all the time as lenders bring out new products and remove old ones in response to the economic environment.
Your rate won’t change while you are on a fixed deal.
Households with a tracker mortgage could see their rate reduced if the benchmark it follows is cut.
However, it can also work the other way and rates can go up if its benchmark rises.
When should I get a mortgage?
The earlier you start getting prepared for a mortgage, the better position you will be in when you are purchasing a property or remortgaging.
It can take four to six weeks for a mortgage to be approved depending how much information a lender needs.
Getting your mortgage prepared when buying your first home can make you more attractive to sellers, as they can see you have finance in place and are serious about proceeding with a purchase.
You need to start preparing earlier if you are remortgaging.
A mortgage application can take four to six weeks[/caption]
A lender will move you onto a more pricey SVR once your mortgage deal comes to an end, which usually means your monthly repayments will increase.
Start looking for a new mortgage at least three months before your deal ends.
It can take at least two months for a remortgage to complete, so you need to allow time to find a new deal and make the application.
Mortgage offers typically last up to six months, so you could start early if you spot a good rate and then time the start date so you avoid any exit fees and move smoothly onto the new rate once your deal expires.
How to compare mortgage rates
Average mortgage interest rates have dropped in recent years as it has been cheaper for banks to raise money on the wholesale markets.
Additionally the record low Bank of England base rate has helped make mortgages cheaper.
The rate is just one factor though and you also have to consider the type of mortgage and how much deposit you will need.
Do you want the certainty of a fixed rate mortgage or the flexibility of a tracker that could get cheaper and doesn’t have exit fees?
There are lots of factors to consider when choosing a mortgage[/caption]
Even the type of fix is a key question.
The best mortgage rates for a 5 year fixed deal may give you a solid half decade of regular repayments, but are you likely to want to move during that term as you could then face paying ERCs or exit fees.
Don’t just choose the lowest rate as these often come with high fees, which pushes up the total cost of your mortgage.
There are mortgage calculators online that will let you compare the monthly cost of a mortgage based on the interest rate and any fees.
You can use a comparison website to find deals across the market based on your level of deposit and whether you want a fixed or variable rate.
A comparison website will usually let you search for all types of home loans, such as for first-time buyers or the best buy to let mortgages.
This will give you an indication of what is on offer, but you will need to do the application yourself.
Some lenders may not be on comparison websites though, so it is worth searching directly online as well.
Shop around for the best mortgage deals rather than opting for the first bank you see.
A bank or building society will only offer its own options, which limits your choice.
Alternatively, mortgage broker can help search the market more widely and find the most suitable deals for you.
This can be beneficial if you need someone with specialist knowledge, such as if you are self-employed or have hard-to-prove income.
What is mortgage protection insurance?
A mortgage is likely to be your largest debt and the biggest monthly payment you make.
But could you still afford it if you or your partner lost their job or became too ill to work?
Mortgage protection insurance is a type of cover that can provide peace of mind if a borrower becomes unemployed, is in an accident or becomes so unwell that they cannot work.
It usually covers your monthly mortgage repayments for a set period such as a year or two and some policies will payout more to help with other living costs.
Check the policy first though as there may be exclusions for certain illnesses or pre-existing conditions.
Other forms of insurance such as life cover can also payout to cover the mortgage if you or another borrower dies.
Income protection can also provide cover if you are temporarily unable to work due to illness or injury.
There is also critical illness cover that can pay a lump sum if you have a specific health condition.
Which bank has the best mortgage rates?
The best mortgage rates will vary among lenders.
It will depend on a bank or building society’s appetite for lending at the time.
Some may be good for first-time buyers, while others could have a range targeted at those looking to remortgage.
You can find the best mortgage rates by searching for deals on a comparison website, or a mortgage broker could also help find the most suitable offers based on your financial situation.
What is the lowest mortgage interest rate right now?
Mortgage interest rates can change all the time.
The lowest mortgage rate in the UK has in the past gone below 1%.
It depends on the type of mortgage you are going for and your deposit.
The average mortgage rate on a two-year fix at 75% LTV in March 2021 was 1.56%, according to the Bank of England.
The rate on a 95% LTV mortgage was 4.14%.