How To Find The Perfect Mortgage
So you’re ready to buy your home?
Whether it’s your first time, or you’ve bought a home before, getting a foot on the property ladder can be difficult.
How Much Can I Borrow?
The amount you can borrow towards buying a home will very much depend on your level of income and the amount you have for a deposit. Your spouse’s income (if any) could also be taken into consideration on a joint mortgage application.
Different banks and lenders offer different multipliers depending on your income levels, but you should expect somewhere between 2 to 3 times the amount you earn. It’s rare for lenders to offer more than that.
First Time Buyer
Most banks and lenders will queue up to offer you a deal as a first-time buyer. This is because there are generally lower deposits available, meaning the banks and lenders make more on interest.
You can use this to your advantage because you’ll have a larger choice of lenders available to you. You can shop around for the best deals and perks thrown in to make sure the amount you’re paying back is as low as it can possibly be.
Buy To Let
If you’re buying a home in order to let it out and make some extra income, then a buy to let mortgage is the option for you.
This is a special type of mortgage and as such you might have a smaller choice of lenders. This usually means a larger deposit, higher fees, and higher interest rates. This is because there is more risk for the lender as not all tenants pay on time and you may not always be able to cover the extra payments out of your own pockets.
It’s important that if you are buying a buy to let property you let the mortgage company know. Many mortgages have clauses written into them which don’t allow them to be used for purely buy to let properties so be upfront with this from the start.
Self Employed Mortgages
If you have retired from active service and have set up your own business (or are working as a contractor) then you will be classed as self-employed.
Some banks and lenders don’t like to lend to people who are self-employed, because your income is not set and there is a higher risk that you might not be able to keep up with repayments.
What happens if that client stops working with you, or your invoices aren’t paid on time? Do you get the same amount of income every month or does it vary? These are all things that worry lenders.
There will be specialist lenders and brokers who help people who are self-employed. Usually, you’ll be asked to provide 1 to 2 years previous accounts and a year’s future projections to show that you have a stable income and are less of a risk to lend to.
As your choices are a bit more limited, your fees and interest rates will usually be a bit higher. You might also be asked for a higher deposit amount in order to buy the house.
If you are keeping your existing home, but just want a better mortgage deal, then a remortgage is the option you’d be looking for. This would also be the option you’d be looking for if you want to release some equity tied into your home to enjoy the finer things in life or to pay off debts or loans you might have.
Most banks and mainstream lenders will offer a remortgage product to you, as long as your credit rating is good and you can afford the extra payments.
Can I Get A Mortage If I Have Poor Credit?
If your credit rating is not great, you may find it more difficult to get a mortgage. Lenders carry out credit checks before deciding whether to offer you a deal.
If you have a poor credit history, your choice of lender becomes a bit more narrow and as a result, the interest rates are often higher. There are banks and brokers out there who specialise in mortgages for people with poor credit ratings, although they will charge higher fees and rates because there is less competition out there for their services. You are also likely to be asked to put forward a higher deposit amount so you may need to factor this into your plan before applying.
Different Mortgage Deals
Now you’ve worked out how much you can borrow, what deposit you have and which type of mortgage you’re looking for, it’s time to look at various deals. They come in a few types.
Variable-Rate Mortgages are mortgages that are not fixed at the same price. They will vary, depending on the interest rate of the lender.
There is a tracker style, where you pay a percentage over and above the Bank Of England’s base interest rate. When the interest rate changes, so does your payment. Say the BoE’s base rate is 1%, you’d probably be paying 4%. If that base rate changes, your tracker rate changes with it.
You also have a Discounted Variable-Rate Mortgage where your lender chooses their own variable rates and gives you a fixed discount. Say the lender’s rate is 5%, and they give you a 1.5% discount, you’d pay 3.5% interest. Again this can change up or down depending on your lender and how often they change things.
With Variable-Rate Mortgages, the good news is that your rate can go down. The bad news is that it can go up too. And not all tracker-style mortgages have an option for the mortgage rate to go down. The average, according to Moneyfacts in May 2019, was 2.47% for trackers and 2.84% for discounted.
Fixed-Rate Mortgages are fixed for a period of time, usually anywhere from 2-5 years. Unlike variable-rate mortgages, you pay the same amount every month for as long as the deal is on. You’re protected from interest rate changes, but the downside is that your rate will never go down either. These fixed-rate mortgages are great for people who want a fixed monthly payment, but your rates are usually higher as a result. The average rate, again according to Moneyfacts in May 2019, was 2.9%.
Interest Only vs Repayment
Don’t panic with all of these choices - we’re nearly there!
Your last decision will be to choose between Interest Only and Repayment. Interest-only deals are where you are only paying interest over the length of the deal. Once you get to the end of the deal you still have to pay back the value of the loan.
This would have been the price of the property, minus your deposit, at the time you bought it. The property does tend to increase in value over time, so if you sell the property to pay back the loan you’ll probably make a profit towards your next home purchase. The risk is that you don’t have enough money to pay the loan off at the end of the deal.
Repayment Mortgages are where you’re paying off interest and the loan amount together over the life of the deal. Higher monthly payments, but when the loan is fully repaid you owe the bank/lender nothing. Anything you sell the property for is yours, or you can continue to live there without any monthly payments. Perfect in middle-age or retirement years.
Banks vs Brokers
Now you’ve made your choices, it’s time to pick whether you go with a bank or a broker to get your deal. Banks will offer you their best deals, but not tell you if there are cheaper deals elsewhere. Brokers, because you are paying them a fee, will usually give you the best possible deal they can find regardless of which lender it is. Brokers charge higher fees but can often save you a larger amount on your monthly repayments.
Hopefully, this whistle-stop tour of mortgages has given you enough insight into mortgages to help you understand the lingo and structure to know what would work well for you. You now have a far better idea of what the perfect mortgage deal for you would look like. There will still be other factors to bear in mind, depending on your circumstances which is where our team comes in.
With decades of experience in lending and mortgages, as well as our knowledge of the military, Apex can help you find the best financial products on the market. Get in touch and our friendly team will help you through the various considerations you need to allow for during this next exciting step.