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How to choose a mortgage

Whether you're a First Time Buyer or you've owned a property before, we break down what you should be asking when you consider a mortgage.

How to choose a mortgage

What is a mortgage?

A mortgage is a loan you get in order to buy a property. You provide a deposit out of your own savings, and the lender assesses your affordability based on how much you earn, what your credit history is like and what your outgoings are. When you’re approved, the money is paid to your seller, and you pay back a monthly amount over a number of years, which usually includes the interest.

Mortgage lenders are often banks and building societies, but they can simply be lenders who only work with mortgages.

What does LTV mean?

LTV stands for Loan To Value – it’s the percentage you often see by the side of the mortgage deal. So a 90% LTV would mean you had a mortgage of 90% and you provided a deposit of 10%. The lower the LTV, the bigger your deposit and the less you’re borrowing.

As there is less risk for the lender, interest rates for lower LTVs tend to be better. There are also usually more options from a large variety of lenders.

When you get up to the 90% and even 95% LTVs, you may find the interest rates are higher and that there aren’t that many options.

How important is my deposit?

The LTV is why your deposit matters so much. Saving up a 20% deposit means that more options will be open to you. That said, if you’ve not got a huge deposit but you have a good income and you really want to get on the ladder, you could always take the deal and remortgage a few years down the line.

 
What does fixed rate mean?

A fixed rate is a set rate of interest that you’ll pay for a certain time. It’s a way of locking in a good deal, and knowing you’ll pay the same amount each month, regardless of changes with the lender. For example, you might find a great deal for 2% interest, so you might get it fixed rate for 2 years.

Usually the lower the interest, the lower the time you can lock it in for. The good thing is that you can remortgage when the fixed rate ends, and at that point you will have paid off more – so your LTV the next time around will be lower, and you can hopefully get an even better rate.

When your fixed rate ends, you are transferred to the SVR (Standard Variable Rate) of interest. This changes and is often not as good a deal as a fixed rate would be, so it’s usually worth remortgaging. You can do this by staying with your current lender or move to someone else for a better deal.

It’s also worth bearing in mind that if you lock in a fixed rate for a long time, maybe 5 years, the interest rate may drop, so you’ll be paying a higher amount than you’d need to, because you’re locked in to the 5 years. It also isn’t a good idea to do a long term fixed rate if you might want to move again within that time, as you’d have to pay a fee.

It’s worth looking at different interest rates, and seeing what offers are available to you, based on your income, credit score, spending and deposit.

How do I choose?

Whilst you should definitely do your own research, it’s really worth talking to a mortgage broker. This is someone who is independent from any one lender, but has access to a variety of deals and can tell you which offers might be best for you. If you have a small deposit, you may want to get a fixed rate for two years and then remortgage for a better deal, when you’ve built up equity in your home.

If you have a larger deposit, or if you’re buying a second home or Buy to Let property, there will be different options.

Speaking to a professional mortgage broker, especially an independent one, will help you discover what options are out there for you, and which one will work best in your circumstances.
 

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