How to avoid getting into a mortgage fix... unless you want to
Learning which type of home loan will suit your circumstances is key to financial security
With thousands of home loans on offer, you need a mortgage advisor to help you through the jungle of income multiples, fixed rates, loans to value, caps, trackers and offsets.
But doing homework before seeing an expert will help move more swiftly to your best deal. It will also aid your home purchase search. Knowing roughly what you can borrow based on savings and income, and the likely monthly outlay, will prevent you viewing places that are too expensive or not dear enough.
Your loan is based firstly on your income – either yours alone or with a partner – although some mortgages can involve more. Affordability is key, so extras such as bonuses, overtime or commission count provided they are regular and not a one-off.
Loan companies vary but typically, for two people, they will lend four times the higher income plus once that of the lower earning partner. So if you earn £30,000 and your partner makes £20,000, you’ll get £120,000 for you plus £20,000 – £140,000.
Lenders want to be sure you can continue payments without stress. Interest rates are at their lowest ever. They could rise again, putting pressure on mortgage payments. They will check for leeway in your finances.
The second component is your deposit in relation to the purchase price. This is called the loan to value ratio – LTV in adviser jargon. An 85% LTV equals a 15% deposit while a 60% LTV means you have a 40% deposit.
The lower the LTV, the happier the lender as a rule – reflected in better interest rates.
A fixed-rate mortgage gives repayment certainty. You’ll pay more for a longer fixed period, but that increases your security and saves you having to go through the process, including upfront costs, again too soon.
A tracker mortgage is tied to an interest rate so it goes up when that rises and down when it falls.
Variable rates can start cheaper, possibly even going down, but could go up at any time. But if you are on a variable rate, you generally won’t have to pay exit charges should you move – fixed rates usually have a sliding scale making them priciest at the start. Find out first.
Offset mortgages are less common – they allow you to “park” money in your mortgage account when you have a lot and get interest on it. They might appeal to those in jobs who have large incomes one month and not much the next.