Steps to follow
Make sure your credit rating is in good shape – some companies do free credit checks. You can improve your credit rating by: registering on the electoral roll at your current address; paying off past debts and arrears; closing cards and accounts you no longer use; making sure people you are linked to on your credit report should still be there.
There are a bewildering number of mortgage types out there but first off decide whether to go for a repayment mortgage (where you pay off some of the cash you’ve borrowed each month, plus interest) or an interest only mortgage (no payments off the capital – tends to be smaller monthly bill but you’ll need to sort out how to repay the amount borrowed, eg an ISA or pension scheme). You could also start off with an interest only and then swap to a repayment as your earnings increase.
Next decide if you want a fixed or a variable rate mortgage. Fixed gives you peace of mind that your payments will stay the same for the period of the mortgage (can be anything from 1-10 years but 2-5 is more usual) but you’ll probably pay a higher rate. Variable (which usually tracks at a set rate above the Bank of England’s base rate), of course, is great when interest rates are low but you could be in trouble if they rocket. There are numerous variations on these themes – just make sure you shop around before you decide which company to go with; there are a lot of different deals out there – at very different costs – and you need to do your research to find the one that is right for you.
Get together as big a deposit as possible – the larger your deposit, the better deal you are likely to get. Since the credit crunch set in, you’d be hard-pressed to find a 100% mortgage anyway.
Pay close attention to the additional fees you might have to pay – don’t just go on the headline interest rate. Things to watch for in the small print include things like arrangement fees – which can run into £1000s if you’re not careful - valuation costs and redemption (exit) fees.
Watch out for tie-ins - some lenders demand a fee when you take your buildings insurance out with a company other than your mortgage provider, or when you change your mortgage - even when staying with the same provider.
If you think you might be able to pay a bit more off the mortgage some months, go for a mortgage that lets you overpay – it can save you a fortune in the long run.
Try not to add extras such as mortgage fees to your mortgage, as you’ll have to pay interest on them. Instead, pay for these out of savings if possible.
Work out the true cost of your mortgage by using an online mortgage calculator (eg the Which? mortgage calculator).
Don’t overstretch yourself – mortgage rates are low at the moment but they will rise eventually so make sure you’re going to still be able to afford your mortgage payments if and when they go up.
Go to an independent mortgage adviser – this will give you more consumer protection if you’re mis-sold a mortgage. Be aware that they won’t necessarily find you the best deal presently on offer, so you’ll need to do your own research as well.
What to watch out for
Many lenders offer incentives (such as free valuations or paying your legal fees), but ensure there are no hidden catches like additional fees or a demand to repay the value of the incentive if you repay the mortgage early.
Solicitor’s top tip
If you borrow more than 80-95 per cent of the property’s value, some lenders will insist that you take out Mortgage Indemnity Insurance. However, the mortgage indemnity will usually cover your lender for only part of its loss if you can’t keep up the payments so they’ll then chase you for the rest. If you’re able to, borrow just below the threshold. So if it starts at 90 per cent, take out a mortgage for 89.99 per cent.
Home buying guide
Money made clear
Home buying institute
Money saving expert
Which? interactive mortgage calculator
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