Mortgages: How to get the best deal
Qualifying for a mortgage can be a complicated affair and some first-time buyers may find it daunting. It is important to choose the correct lender and not to pay a higher rate than necessary.
That means that for some buyers, waiting to save more for a deposit can ultimately save many thousands of pounds on the annual mortgage bill.
By getting to know the process of how a mortgage works and what is required by the lenders, it is possible both to secure a lower interest rate and to increase the chances of being accepted for an appropriately sized loan.
A major difficulty with banks today is that they constantly change their lending criteria. To get a mortgage, applicants will need a good deposit, a clean credit history and a decent income.
For many first-time buyers the support of their parents may make the difference between getting a mortgage or not.
The size of your deposit determines your monthly mortgage payments and the interest rate that you pay. Virtually all lenders use a loan-to-value banding system which means you pay much more if you have a smaller deposit.
We are consistently advising our clients in a position to save a bigger deposit to put down another 5% of the property value. This may be a lot to ask at a time when money is tight, but there are usually big savings to be made with another 5% added to the deposit.
Looking at the Post Office's mortgage rates, for example, the lowest two-year fixed rate they offer if you have a 10% deposit is 5.75%. Yet, with another 5% deposit, the mortgage rate drops to 4.29%.
So, over two years on a £200,000 interest-only mortgage, you would pay £5,840 less if you are able to save the extra 5% deposit.
Interest rate savings are more substantial with a longer term mortgage.
Northern Rock's lowest two-year fixed rate for those with a 30% deposit is 3.39%, but if you have a 10% deposit the rate increases to 5.88%.
Borrowers able to access the lowest Northern Rock rates will save £8,965 (including arrangement fees) over two years on a £200,000 mortgage compared with those able to take a fixed-rate with the smallest deposit available.
Before a bank will offer a mortgage, they will want you to know what your monthly expenses are and how much you have left in your bank account at the end of the month.
Virtually all unsecured debt is taken into consideration and any credit card or loan payments will reduce the amount that you can borrow.
Banks have clamped down on borrowers if they are attempting to take out an interest-only mortgage and it is likely that you will now require a 25% deposit to qualify for interest-only. Customers of HSBC and First Direct must earn a minimum of £30,000 a year to qualify for an interest-only mortgage
Interest-only mortgages offer a more affordable way of getting on the property ladder and the difference in the cost of the monthly payments is as much as £360 a month. This is on a £200,000 mortgage with a 25-year term on a typical interest rate.
Key tips for getting a mortgage include:
- Ensuring you are on the electoral roll
- Making sure you do not miss any financial commitments. Missing a credit card or loan payment will count against you
- Reducing your personal debt will enable you to borrow more
- Ensuring you do not apply for credit while a mortgage application is going through
- Keeping pay-slips and P60s
- Checking your credit rating to make sure that you know what your credit score is
- Doing your homework to find out what the lender requires from you.
There are some good options for borrowers looking to remortgage, but rates are more expensive than they were three months ago.
Whether you should remortgage really does depend on the lender that you are with and the type of rate you are on.
If you are on your lender's standard variable rate then there is a danger your bank will raise your rate by more than any Bank of England base rate change.
I would advise you to call your lender to see what they will offer you to stay with them and then research the best rate available to you in the market.
It is still possible to remortgage on to a competitive rate which is lower than the average standard variable rate. Two-year base rate trackers are available from 2.28% and two-year fixed-rate deals start at 3%. Five-year fixed-rate deals are more expensive as they start at 4.39%.
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