Your mortgage is likely to be the biggest financial commitment of your life. And, your monthly payment is almost certainly the most significant expense you pay every month.
So, it’s perhaps not surprising that there is such a focus on the interest rate you pay when it comes to choosing a new mortgage.
With the Base rate at a record low, there are some highly competitive deals available in the market. While online or newspaper ‘best buy’ tables showcase the lowest rates, it’s not just the rate you pay that is important when it comes to getting a mortgage.
Here are three other factors to consider.
1. The type of rate
When it comes to choosing a new mortgage, before you start looking at the interest rate charged it’s important to think about the type of deal that you are looking for:
- A fixed rate – this guarantees your mortgage payments for a fixed period, giving you the peace of mind that you know exactly what you will pay for a specified time. However, fixed rates generally come with steep ‘early repayment charges’ if you want to pay the loan off early. You could also end up paying more than you need to if interest rates fell while you are on your fixed rate.
- A variable/tracker rate – here, the interest rate and your monthly repayments are linked to either the Base rate or your lender’s Standard Variable Rate (SVR). You’ll typically benefit from reduced payments when interest rates fall, but you will also see your repayments go up if interest rates were to rise.
Historically, variable rate mortgages were popular as they tended to offer lower interest rates than fixed rate alternatives. However, in recent years, this is not the case.
If you have a strict monthly budget, then a variable/tracker rate might not be ideal as your repayments could rise at short notice, leaving you struggling to make your repayments. A fixed rate may therefore be more suitable but bear in mind that there can be significant charges for coming out of a fixed rate early.
Speak to an independent mortgage expert for advice.
2. The term of the rate
Short-term deals (typically two or three years) tend to offer lower interest rates than longer-term deals (five to ten years).
You might choose a short-term deal if you are trying to reduce your repayments as much as possible in the early years. Or, if you’re unsure if you are going to remain in the property for the long term, a two-year deal will give you the flexibility to change your arrangements in a couple of years if your circumstances are different.
In recent years, however, many borrowers have chosen the security of a much longer deal – up to ten years in some cases. Read more about the pros and cons of long-term fixed-rate mortgages.
This provides security and stability in the medium-term and allows you to lock into a very competitive deal for a long period. You’ll benefit from low repayments even if interest rates rise over a five or ten-year period, giving you the peace of mind that you know exactly what you will be paying.
Again, bear in mind that committing to a five or ten-year deal may mean you face early repayment charges if you want to repay part or all of the mortgage within this period.
3. Flexible features
Once you have decided what type of mortgage rate you want, and how long you want to fix or track for, you then need to think about whether you want your mortgage to have any flexible features. These might include:
- The ability to make overpayments and underpayments
- The opportunity to take a payment holiday
- Drawing down previous overpayments
- Offsetting savings against your mortgage.
Both fixed and variable/tracker rate deals can offer flexible features, the most common of which is the ability to overpay.
…then choose the interest rate
Once you have determined the type of deal you prefer, how long you’d like it to be for, and whether you require any flexible features, then you can start comparing interest rates.
Remember that the cheapest deal in a ‘best buy’ table might not be the right deal for you. It might not offer the security you need or may be highly inflexible in terms of overpayments. Make sure you choose the type of deal that’s right for you first, and then find the best rate.
A quick reminder also that, when you are choosing a mortgage deal, don’t forget to factor in the fees.
Many mortgage deals come with arrangement fees of hundreds of pounds or more, and these can have an impact on the overall cost of your mortgage. Sometimes choosing a slightly higher interest rate with a lower fee could save you money overall.
How we can help
An independent mortgage broker can help you to establish exactly the sort of deal you are looking for. They can then scour the market to find the most appropriate product.
They will also cost up various options, considering both fees and interest rates, to find an appropriate deal for you.
If you need advice, we can help. Please get in touch by email email@example.com or call us on (0207) 808 4120.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.