Pick a mortgage to suit you

One of the biggest choices you face when you take out a mortgage is the type of loan you want.

The decision you make will depend on your attitude to risk and how flexible you can be on monthly payments.

”Most lenders have a choice of rates, so you can decide whether you are comfortable with a fluctuating variable rate or prefer the security of fixed monthly repayments,” says Barry Blackshaw, senior business development manager, at HSBC.

How much should you borrow?

Try to work out how much you can afford to repay each month, rather than how much a lender will give you and consider how settled you are.

Over-stretching yourself can mean you get into difficulties but if you can afford to take out a bigger loan, it’s helpful to know that lenders have increased the amount they will lend, says David Hollingworth, of brokers London & Country.

“If you have no debts or dependents, you can sometimes borrow up to five times your salary, and if you’re buying with someone else, you can borrow up to four and half times your joint income,” he says.

Find out how much you can borrow

Fixed rates

A fixed rate means that the level of interest you pay is fixed throughout the loan so you know exactly how much you will pay each month. The risk is that you will pay more than you would pay on a variable rate mortgage, should the Bank of England Base Rate fall.

“Recently, fixed rate mortgages have become more expensive,” says Mark Chilton, chief executive of Purely Mortgages: “This is because the base rate is predicted to rise.”

But many borrowers still choose the security of a fixed rate.

“You should get a fixed rate loan at less than five per cent,” advises Louise Cuming, head of mortgages at Moneysupermarket.com. “Relatively-speaking, the cheaper fixed rates aren’t much more expensive than the best variables.”

Fixed rate mortgages

Base rate trackers

A tracker has a rate which follows the Bank of England base rate with a pre-determined margin, for example 0.17 per cent below base rate at 4.50, so 4.33 per cent.

If the base rate falls, then the interest rate on your mortgage falls automatically. However, if the base rate increases, so do your payments. With many trackers currently at less than 4.5 per cent, they are slightly cheaper than fixed rates.

Cuming says: “If you’ve not borrowed your maximum amount and are willing to take more of a risk, trackers can work well.”

Find a best-buy mortgage

Capped rates

Capped rates are variable mortgages but there’s a limit (cap) on how much you will have to pay. Below that, the rate you pay fluctuates in line with the lender’s SVR or the base rate, so you can end up paying less.

But brokers say that they’re not popular at the moment. “Capped rates are few and far between,” says Chilton: “They’re often poor value compared to fixed rates.”

Capped rate mortgages

Discounts

With discount mortgages, the lender’s standard variable rate (SVR) is reduced by a set percentage for the initial offer period. If the rate changes, so does the rate you have to pay, although you keep the discount for the initial period.

“There’s no certainty with these,” says Cuming: “But if you want a variable mortgage, it’s better to go for a tracker which follows the base rate and is more transparent, than one dependent on an individual lender’s SVR.”

Discount mortgages

Flexible mortgages

Flexible mortgages can be more expensive but let you overpay, take payment holidays and borrow back loans in certain circumstances and some lenders like the Nationwide and Standard Life Bank offer these options on all their mortgage loans.

Offset mortgages are a little more specialist, linking your savings and sometimes also your current account to your mortgage. This means that money in your linked accounts is literally ‘offset’ against your mortgage account, cutting the interest you pay on your mortgage.

Current account mortgages bring together your mortgage, current account, savings and loans.

Mortgage advisers warn they are only for the financially disciplined but they can allow you to reduce the amount of interest you pay on your borrowing, as well as the term.

“As many as eight out of ten of our customers are on track to pay off their mortgage early,” says Deborah Milsom, spokesperson for The One Account.

Find a best-buy mortgage

Fees

Fierce competition in the market has seen lenders slash their rates. But they’ve balanced their books by upping their fees.

Hollingworth says: “You need to add up the fees, including arrangement fee. Check if there is a redemption penalty or a Higher Lending Charge (HLC) as these can significantly push up the costs.”

calculate your mortgage repayments here