Navigating the mortgage maze

If you want to follow in the footsteps of the thousands of first-time buyers who’ve already taken out a mortgage this year, figuring out how to navigate the mortgage maze is a must.

Nearly 70,000 first-time mortgages were taken out in the first quarter of 2014 – a jump of 34% on the same period last year, says the Council of Mortgage Lenders.

These first-time buyers may have been encouraged by low interest rates, but it’s important to remember these can go up as well as down and you need to be able to cope with the repayments.

Indeed, new rules mean you’ll need to prove you can afford your repayments now and in the future.

It’s also important to understand the types of mortgages on offer. Here are some of the main examples:

Fixed rate

A fixed rate mortgage charges a fixed interest rate for a set period of time – usually two, three, four or five years. This can be helpful, as you will always pay the same rate. But if interest rates go down, you won’t benefit as your rate will stay unchanged.

Standard variable rate

The interest rate moves up or down at the lender’s discretion, usually reflecting what the Bank of England is doing with the base rate. This type of deal lasts until your mortgage ends. Obviously, a run of low rates means a lender may keep rates low – and you will be quids in – but if the rate rises, you need to be able to meet higher monthly repayments.

Discount rate

Discount rate mortgages start off cheaper – so if you are on a tight budget the lower monthly repayment will help. If a lender cuts its standard variable rate, you’ll benefit and pay a lower rate each month – but the opposite is also true.

Tracker mortgages

Tracker mortgages move directly in line with another interest rate, normally the Bank of England’s base rate. So if the base rate goes up by 0.5%, your mortgage rate will go up by 0.5% – and vice versa.

Capped rate

You pay the lender’s standard variable rate. However, if this goes above a certain level, your mortgage rate won’t rise any further, it will be capped at that point.

Offset

If you want to keep interest on your mortgage down, it may be worth considering an offset mortgage. This allows you to use your savings to temporarily (or permanently if you wish) reduce your mortgage. However, these are niche products and may be harder to find.

Interest-only

You simply pay the interest on the mortgage, but none of the actual loan until the end of the term. However, increased eligibility requirements and the need to show a suitable repayment plan that will cover the original loan amount at the end of the term will probably now make new applications available to only a few.

With all mortgages you need to think about the cost of any fees and whether there is an early repayment charge or exit fee.

Unless you are sure which kind of rate is best for you, speak to a mortgage broker or financial adviser.

You can find out more about comparing and choosing mortgages – and how a mortgage adviser can help you – in our guide.

Affording your home – new lending rules

New mortgage rules mean lenders have to “stress test” borrowers against a rise in interest rates, and whether they can afford repayments while covering essential outgoings such as household bills.

For example, a 3% rise in mortgage interest rates could cause major problems for many first-time buyers.

With the average first-time buyer mortgage being £140,800 with a monthly repayment of £749 (based on 3.4% APR) , a 3% rise in interest rates would result in an increase of £265 a month – a figure almost half of buyers would struggle to afford, according to Money Advice Service research.

Check out Rightmove’s affordability calculator to see what you can afford.

Now you’ve brushed up on your interest rate knowledge, try out the quiz below to see how clued up you are about mortgages:

All information accurate at time of publication

This article is provided by the Money Advice Service.

Money Advice Service


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