While becoming a homeowner is undoubtedly one of the biggest achievements in life, knowing how to choose a mortgage that’s right for you can be a difficult task.
The type of mortgage deal you choose to go with can make thousands of pounds of difference in the long-term, so it’s a good idea to take your time and choose wisely.
There are lots of different mortgages available on the market, whether you’re a first-time buyer or a seasoned investor. This makes comparing mortgage deals difficult, but our guide will aim to explain the important things to look out for when searching for the best mortgage deal to suit you.
How much are you allowed to borrow?
Before you start looking for your dream home, it is important to find out how much a mortgage lender will allow you to borrow.
Most lenders will typically allow between four to five times your individual income, or three to four times your joint income if you’re applying for a mortgage with somebody else.
Borrowing amounts will vary between lenders, and each will have different criteria for setting how much you are allowed to borrow. For example, if you already have a lot of loans or credit cards in place, your maximum borrowing amount may be lower.
It’s important to think about how much you want to pay each month for your new mortgage. It’s not advisable to make your mortgage payments more than 30% of your income, as you may struggle to save or have disposable income for holidays and home improvements.
What about a deposit?
Saving for a deposit will mean you have the freedom to borrow less, and your Loan-to-value ratio will be lower and you’ll qualify for lower mortgage rates.
The loan-to-value ratio is the proportion of the amount you borrow in comparison to the property price. For example, a £30,000 deposit on a £300,000 home is 10% so the ratio is 10%.
Comparing mortgage deals by interest rates
When looking at how to choose a mortgage, the interest rate is one of the most important factors. It can make a huge difference to your monthly and annual payments, and be a deciding factor in the type of property you can afford to buy.
A lower interest rate will naturally save you money, but choosing the right type of deal for your circumstances is most important.
Mortgages can be categorised according to the way their interest rates work, and there are four types for you to be aware of:
With a fixed-rate mortgage, the interest rate on the deal remains the same for a set amount of time, usually between two and five years.
These are the most common types of mortgage on the market, and give you the freedom to choose a good rate.
Be aware you’ll need to remember to remortgage at the end of your fixed term agreement, or you could be transferred to your lender’s standard variable rate, which is generally more expensive.
This type of mortgage is set at a certain percentage above the Bank of England base rate.
For example, if the base rate is 1.5% and your mortgage rate is ‘base rate plus 2%’ you’ll pay a mortgage rate of 3.5%
Since the COVID-19 outbreak, Tracker mortgages are a much less popular option, which is due to the base rate dropping to an all-time low of 0.1%.
Discount mortgages have a reduced interest rate, which is set at a fixed amount below the mortgage lender’s standard variable rate (SVR) for a set amount of time, usually two years.
For example, if the lender has an SVR of 6% and the mortgage is set at 1.5% below that rate, you’ll pay 4.5%. If the lender’s rate fluctuates, so will your rate.
Standard-variable rate mortgages
When your fixed, tracker or discount timeframe ends, you’ll be moved to your lender’s standard variable rate (SVR).
The SVR is usually more expensive and can fluctuate on a monthly basis, so it’s important to steer clear and switch to a new deal, remortgaging, before the end of the deal period.
Top tips for how to choose a mortgage deal that suits you
Understand what you can afford
Using the different mortgage options available, you can calculate how much your monthly repayments will be. From here, you can calculate the best mortgage deal for you.
Do your research
There are thousands of mortgage options available, and hundreds of lenders, all with varying fees and rates. It’s important not to settle for the first one you find. Shop around and be patient, you’ll find the one that’s best for you.
Keep an eye on extra interest
If you’re strapped for cash, instead of paying your mortgage fees upfront, you can add them to your loan. This may seem like a good option in the short term but will result in you paying interest on the fees in the long term.
Choose the fixed term that suits you
Many fixed-rate mortgages come with early repayment charges, which will incur if you exceed the fee-free limit for the overpayment. This is usually 10% per year, or if you leave the mortgage during an introductory period.
If you’re likely to want to move house in the next few years, consider a shorter-term fixed mortgage.
Get help from a mortgage specialist
Choosing a mortgage can be a bit of a minefield, so it can be useful to get an expert on your side.
A mortgage advisor or broker can help advise you on the best deal for your circumstances.
However, be mindful that some mortgage deals are only available to people applying directly (with no broker involved) while other deals are exclusive to brokers.
To disrupt matters further, some mortgage brokers only work with a select panel of lenders, meaning they can’t share deals from other lenders which may work out cheaper.
To ensure you have access to the best deal, it’s a good idea to use a ‘whole market’ broker who can assess every deal available to you and recommend the right option.
Finding your perfect home
Once you’ve secured the right mortgage deal for you, you can start to dream of your ideal home.
Manchester is a great place to settle down, as it’s full of vibrant neighbourhoods, an abundance of character and buildings stacked with originality.
New Cross Central is a vision for a new vibrant quarter of the city, and with homes ready to move into in 2022, you can own your own part of the city centre.
With a mix of spacious apartments and family-focused townhouses, there’s something to suit everyone. Enquire today about your home in New Cross Central.