Guide to Getting a Mortgage

How much can I borrow?

The amount you will be able to borrow depends on a number of different factors. Before the credit crunch, which hit hard in late 2007, and the resulting dip in the market, the amount you could borrow was often based on a multiple of your salary.

These days however, lenders are far more cautious, and most will carry out a more detailed affordability assessment before agreeing to a mortgage deal.

Each mortgage provider will have its own lending criteria, but a good credit record is be essential, and your disposable income – which is your total income minus bills, any other debts and living expenses – will be a big deciding factor.

Another big factor that can get you a better mortgage deal is how big your deposit it. If you have saved more, you should be able to borrow more and get a better interest rate too.

According to the Council of Mortgage Lenders (CML), the average deposit for first-time buyers was 25 per cent in June 2009.

Most mortgage providers will lend up to 75 per cent of the property value, though some will lend as much as 90 per cent. You should bear in mind though, that if you borrow more, you will probably have to agree to a higher interest rate.

How do I compare deals?

The range of deals on offer – including variable, capped, fixed or one accounts – can be confusing at first. The first thing to look at is the interest rate on the mortgage. Obviously, the lower the rate, the less you pay. But be warned; deals that scream a very low initial interest rate may in fact lock you in to a much higher rate later on, or might force you to pay heavy penalties for switching to a better scheme. Or they may demand you pay for costly insurance policies.

The best deals offer a good interest rate, the freedom to move to a different mortgage or different lender when you want, and low set-up costs – though you might struggle to find a mortgage offering all of these things.

You can compare mortgage deals online using a comparison service. Many different websites offer this service, though you should still do your own research to make sure that all providers and deals have been considered.

Variable or Fixed-rate mortgages?

There are essentially two types of mortgage to choose from:

• Variable rate. The rate of interest you pay on your mortgage is subject to change if you have a variable rate deal. Tracker mortgages are usually linked to the Bank of England’s base rate, while discounted deals are usually linked to the lender’s own Standard Variable Rate (SVR). This means that although you might get a lower rate when you sign up and benefit from any reductions in the base rate or SVR, you also have to consider the risk that rates will go up.
• Fixed rate. These types of mortgages offer a set interest rate for a certain amount of time, so your repayments will be the same each month. This can help you to budget and will also protect you from any base rate or SVR increases – though obviously you won’t benefit from any reductions like customers on a variable rate mortgage. Once your fixed rate period has ended, your mortgage will revert to the lender’s SVR.
  If you choose a fixed rate mortgage, it’s important that you consider how your repayments will be affected when your deal comes to an end – and your interest rate could jump from just one per cent to two, three or even five per cent depending on interest rates at the time.

Repayment or Interest-only mortgages?

Although there are lots of different deals available, there are only two ways that you can repay your mortgage:

• Capital and Interest, or Repayment. A repayment mortgage is the most common and most straightforward way of paying off your debt. Each month you make one payment, which is used to pay off the interest and some of the debt itself. As long as you keep up the payment over the term of the loan you are guaranteed to have paid off all your debts.
• Interest-only. With an interest-only mortgage, borrowers pay off only the interest every month so they also need to consider how the capital sum will eventually be repaid. It may mean setting up a separate investment plan to pay off the capital owed at the end of the mortgage term.
  An interest-only mortgage involves a substantial element of risk and it is important that anyone who takes one out understands exactly what they are getting into. To get an interest-only mortgage you will have to prove to your lender that you have an alternative means of repaying your debt at the end of the loan period.

Mortgage costs

As well as your deposit, there are a number of other costs that need to be considered when buying a property. Many people have to pay an arrangement or booking fee when they take out a mortgage. Costs vary, from nothing, to over a thousand pounds and you should take this cost into account when comparing rates.

You also need to think about other costs like stamp duty, solicitor’s fees, surveyor’s fees and insurance.

How long should my mortgage be?

Most mortgages run for 25 years, but they don’t have to. The longer they run, the lower the monthly payments will be but equally, the longer you are paying the money back, even at low monthly amounts, the more you will have to pay.

There is good reason to cut the length of the mortgage if you can by paying higher monthly repayments for a 20-year loan, for example. Over the length of the loan, you will save thousands of pounds, as you reduce the debt quicker. And while some lenders offer loans of more than 25 years, meaning your monthly payments will be lower –you will pay more overall.

A large number of Internet sites such as those listed in our Mortgage Sites category have mortgage calculators where you can gage the monthly financial impact of changing the length of your mortgage.

Should I remortgage?

If you're on an outdated mortgage deal then you could save hundreds of pounds by switching to a better rate.

Remortgaging isn’t something that should be taken lightly, and you should seek professional advice before doing so, but it is something that can save you a lot of money in the long run.

More than half of new mortgage approvals were for remortgages in January 2009, according to the CML, with 44,000 homeowners taking advantage of new deals and better rates.

Remortgaging your home will usually involve having a new survey or valuation of your home to see if its value has changed, and can free up money for home improvements or to pay off other debts.

Do I need a mortgage broker?

You don’t have to use a broker, but they can prove to be extremely useful. Mortgage brokers can talk you through the buying process, explain the options available to you and might even have access to deals not available on the high street.

Finding the right deal is essential, as a lower interest rate can shave hundreds, if not thousands, off the life of your mortgage.