If you’re thinking of buying a house, you’ll know it’s not all about ogling dream homes on Zoopla and scanning Pinterest for interior design inspo – first, you’ve got to get an actual mortgage.
There are lots of providers that offer different types of mortgages and, to be honest, they all have rather confusing names to the uninitiated. To help you out, we’ve asked experts to explain exactly what a mortgage is, how you get one, and what types there are.
First things first: what is a mortgage?
A mortgage is a loan. Think about it as a loan that’s insured against the property, so if you don’t pay it back then the lender takes the house. David Blake, mortgage advisor at Which?, explains that a mortgage is based on the income of the people applying for it, as opposed to the property value.
The lender works out what (and if) you can afford to pay back. “It doesn’t matter if you wanted to borrow £10 against the property, if the lender didn’t think you could afford to pay that back they wouldn’t lend it to you,” he says.
Where do I even start?
Before you go looking for a house, it’s best to work out what mortgage value you could get, to avoid disappointment. Most lenders offer a basic calculation online – such as Halifax and Barclays. If you want to compare your options, Money Saving Expert also has one that’s super easy to use. The calculations don’t mean you can guarantee getting a mortgage at that rate, but they give you a rough guide.
Who can help me?
There are people out there who have studied mortgages in great detail, so you don’t have to. Speaking to a mortgage broker is a sensible place to start – they’ll help you understand what you could borrow, what your monthly repayments might look like, and what you can afford. And, says Blake, brokers may also have access to deals that aren’t advertised to the general public.
“They’ll be able to tell you what you need to do, and how to get everything in order in terms of paperwork and credit files to check there’s nothing on there that could cause you an issue,” he says. All being well, generally they can get you a “mortgage in principle” – something that indicates to an estate agent that you’re good for the cash.
Some brokers charge fees and some don’t, so check first. With majority of brokers, you’d only pay fees at the point of mortgage application.
What are the main types of mortgage?
There are three main types: fixed rate, tracker, and variable rate.
The fixed rate offers you a rate of mortgage repayment for a fixed period – usually two, five or ten years. This is a good option for people who couldn’t afford to pay a mortgage if it increased, as it secures the amount you pay each month.
A tracker rate, meanwhile, goes up and down in line with an external rate – usually the Bank of England base rate. It can fluctuate – going down as well as up – though usually there’s a minimum rate put in place by the lender. It’s not generally capped to prevent costs going higher.
A variable rate mortgage is, in theory, like a tracker mortgage but instead of being linked to an external rate, it’s linked to an internal one. “Technically the lender can put up the rate whenever they want,” Blake explains, but in reality that is unlikely as they need to be seen to be offering a competitive rate.
To incentivise customers, tracker and variable rate mortgages tend to offer deals whereby you can overpay your monthly mortgage repayments without facing a penalty – whereas the appeal of a fixed rate is the security.
I’ve found a mortgage I like – now what?
Shop around. Look on comparison sites, and speak to banks and building societies to make sure you analyse the offers in detail. Once you’ve done that, Blake recommends speaking to a broker or advisor.
“I would implore people to seek advice,” he says. “The majority of people I speak to come to us with an idea of what they want – and actually it’s not suitable for them.”
Deborah Vickers, channel director at personal finance comparison site Money Guru, agrees and says you should also look into any fees the lender might charge you. “Regardless of the mortgage deal, do your research – there are so many different types of deals,” she adds. “Mortgage fees can add up, so look around. Check all rates and fees when reviewing mortgage deals.”