Get prepared
There are a few things you can do to improve your chances of getting the best deal, whether you’re a first-time buyer, moving to a new home, or remortgaging, says Nicholas Mendes, a mortgage technical adviser at the broker John Charcol.
One is to “reduce any existing debt as much as possible and avoid taking on new debt in the months leading up to your application,” he says.
Lenders will check your credit record, and you should too, to ensure there are no errors or discrepancies. Access credit records for free using a 30-day trial with Checkmyfile.com (remember to cancel or you’ll pay £14.99 a month after that).
Although it’s easier said than done, saving as much as possible will also help your chances. The bigger your deposit, the better the interest rates available.
Calculate affordability
Online calculators, where you input your income and outgoings, will give you an estimate of how much a lender might offer you. But you should also do thorough calculations of your own towork out how much you can afford.
“Do a budget plan,” says David Hollingworth, at the brokers L&C Mortgages. “Be very clear on what your income is and, importantly, how it’s made up.
“If you’ve got different strands – perhaps a basic salary plus bonus, some overtime, all those things that make up your income – break it down properly.”
Hollingworth says you also need a really good understanding of what your regular outgoings look like. “These are the kinds of things that you’re going to be asked about.
“Affordability isn’t just an income multiple. Lenders will use income and outgoings to come to a decision around how much you might be able to borrow,” he says.
First timer? Look for offers
Many lenders offer incentives like cashback deals, free legal services and property valuations for first-time buyers.
Some aim to attract borrowers with small deposits, like Yorkshire building society’s £5,000 deposit mortgage, which offers up to 99% loan-to-value (LTV) if you have at least £5,000 saved.
And Skipton’s track record mortgage will lend you up to 100% of the price of a home if you can show you have being paying your rent every month – the monthly mortgage payment must come to the same or less than your monthly rent.
Pick what suits you
One of the biggest choices is between a fixed rate, which will remain the same for a set period, or a tracker mortgage, with a rate which rises and (more helpfully) falls with the Bank of England’s base rate.
It’s a very personal choice, Hollingworth says: “If knowing what you’re going to pay each month is important, then you’re going to be looking at a fixed rate – and then it’s a question of how long you want to lock in for.”
Currently, a lot of five-year fixed-rate deals come with lower interest rates than their two-year equivalents (Nationwide building society’s best rate for a five-year fix for home movers is now 3.83%, while the equivalent two-year deal has a rate of 4.35%).
With interest rates heading downwards, Hollingworth says many borrowers are considering shorter-term deals, even though they cost a little more, in the hope rates will have come down in a couple of years when it’s time to look for a new one.
“The trouble is,” he says, “no one knows exactly what is going to happen with interest rates, so it really comes down to what you feel most comfortable with.”
Choosing a deal based on what know is going on in your life may make more sense than second-guessing the Bank of England. Perhaps you are due to pay off other debts, which will leave you able to pay more towards your mortgage in a couple of years, or your status as a borrower might change. “If you buy now at 95% loan-to-value, in two years’ time, you may find yourself in the 90% LTV bracket, meaning more attractive interest rates will be available to you. Those kinds of events are probably the better thing to tie your mortgage to [than interest rate predictions],” says Jon Bone, the head of mortgages at the online mortgage broker Better.co.uk.
Weigh up upfront costs
Many lenders will offer the choice between a mortgage that comes with an arrangement fee and a lower rate of interest, or is fee-free with a higher rate. You may be swayed by the need for lower monthly costs, or by a desire to keep down upfront expenses.
NatWest, for example, has a five-year fix at 4.08% with a “product fee” of £995. It also has a fee-free five-year fix, at 4.23%.
If not, it may not be immediately obvious which is the cheaper option overall.
“You need to look at the total cost of the deal over the scheme period,” Hollingworth says. Use online calculators to work out how much you will pay over the time that you are locked in for.
“If you have a smaller mortgage, then a big fee will represent a bigger proportion of the cost, and therefore it is likely to be better to look at a lower, or no, fee option despite the higher interest rate,” he says. “Conversely a lower rate on a big mortgage may reduce payments enough to warrant the bigger fee.”
Don’t overpay to overpay
If you want to be able to overpay your mortgage, make sure you choose one without early repayment charges for doing so. Most (but not all) lenders allow you to overpay up to a maximum 10% each year without incurring fees.
Always check the terms to avoid additional charges. “The 10% overpayment allowance is an annual feature, but its start date can vary,” Mendes says.
Some lenders calculate it based on the calendar year, others from 1 April, and some from the mortgage anniversary date. Understanding what constitutes the 10% allowance is also crucial.
“It could be based on the original mortgage balance, the balance at the time of overpayment, or the balance at the start of the year,” he says.
Choose a reliable broker
You can research online through comparison sites and calculators to narrow down your mortgage choices, but with thousands of products out there, unless you’re simply transferring to another deal with your existing lender, it will probably make sense to use a broker.
If you are buying a property, the seller’s estate agent might encourage you to use its in-house broker – it is illegal for them to insist you do. Estate agent brokers often work with a limited panel of mortgage lenders – ask them to provide you with details of which ones before you decide.
A whole-of-market broker will have access to the widest range of mortgages, so that they can select the best deal for your needs from across the board.
Always check how they are paid, and what costs you will incur. Brokers receive a commission from lenders when a client signs up for a mortgage, but the amount you pay as a customer varies.
Some brokers charge a fixed rate, some charge a percentage fee, while some don’t charge the client at all.
Get an agreement in principle
It can be useful to get an agreement (or decision) in principle from a lender if you’re househunting, to show estate agents and sellers that you are a serious buyer.
This means providing information to a lender work out the amount they are prepared lend you, but it stops short of an official application. “They aren’t a cast iron guarantee of lending, but they are a good indicator,” says Hollingworth. And they are not binding – so once you are ready to apply, always review your options to see if there are better deals available first.
