Guide to Getting a Mortgage (speak to an online advisor)

Buying a house is the biggest financial commitment most people ever make. As house prices soar, the implications for first-time buyers, those buying to let and those trading up make striking the best deal essential.

How do I start?
Mortgages are big business and the market is competitive. Banks, building societies, insurers, financial advisers and estate agents all offer them. This is good news for you, but means that shopping around is crucial.

How much can I borrow?
The amount you will be able to borrow is at the discretion of the lender. As a rule of thumb 3-5 times your salary. You may also be able to combine your sallary with another person.

Most mortgages are for up to 95% of the property price, which means you need a cash deposit for the remaining five per cent. 100% mortgages are available, but these are often charged at higher rates of interest (up to 1% more than the best deals), making them uncompetitive. It’s cheaper to save for a deposit.

But I need more to buy my house…
Welcome to the property boom! In areas of high prices, some lenders are offering up to five times an individual’s salary. Self-certification mortgages have also increased in popularity. You do not have to provide proof of your earnings to a mortgage company, making them useful for the self employed and freelancers, but research has shown that in a rising market buyers are being tempted to borrow much more than the recommended 3.25 times limit – sometimes up to eight times their salary. This is highly dangerous. Be warned that interest rates are at their lowest level for around 50 years, and could always go up. If interest rates climbed to 10%, a level they last reached in 1992, then the repayments would cost more than your monthly salary.

How do I compare deals?
The range of deals on offer - variable, capped, discount and fixed rates, 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.

Repayment or Interest-only?
There are two types of mortgage:
1. Capital and Interest (repayment)
2. Interest-only.
A repayment mortgage is the most straightforward way of paying off the 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 - 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. The three most common investment plans that people have alongside an interest-only mortgage are endowments, pensions and ISAs.

Do I need a mortgage broker?
You don’t need one, but they can prove to be extremely useful. The market is so competitive that there is a bewildering array of deals available and news offers arrive all the time. A broker can lead you through the mortgage maze. They advise on the best mortgage for you and help you handle the paperwork. And you don’t always have to pick up the bill for their services. Some brokers charge you a fee as well as getting a sales commission from the company which gives you your mortgage but others rely entirely on commission and don’t charge the mortgage applicant. Find out how a broker is paid before you make commitments with them.

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 lowly 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 – but you will pay more overall.

Should I re-mortgage?
Probably. Far too many people stick with one mortgage all the time, languishing on a bank or building society’s standard variable interest rate, which is nearly always a bad deal. Borrowers often end up paying too much because the good introductory offer they chose in the past has run its course and they haven’t bothered to shop around since they took it out. You don’t have to move house to remortgage, though you’ll probably have to change lenders to get a better deal. Compare what’s on offer, including how much it will cost to remortgage. This can cost up to £800 in application fees, valuation fees and lawyers’ bills, but it could well be worth it.

What about buy-to-let mortgages?
For people who want to buy a second property as an investment, rather than as a home, buy-to-let mortgages are now widely available. However, the interest rates charged for them are higher than for your own home, and lenders often only give you 75 to 80% of the value of the property. The existing mortgage you have on your own home will determine how much lenders will be prepared to give you for a buy-to-let property.

The big question is whether or not the property market will go into freefall – leaving you with a second mortgage on a house that is falling in value and which, perhaps, you may not be able to rent out.

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Also see our Jargon Buster for clarification of any words and phrases.

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