How to Get into the Property Market

Written by Karen Bryan

coincoversurfaceWith interest rates of less than 2% on some mortgages, this could be a good time to get into the property market. Buying a home could save you money in the long term compared to paying rent for the rest of you life.

But apart from finding the lowest rate of interest, how do you decide which mortgage is best suited to your requirements? Below is a short explanation of the different types of mortgages.

Variable Rate Mortgages

The amount that you pay may change according to the standard variable rate charged by your lender. Last time that we arranged a mortgage, we planned to pay it off within a couple of years from earnings. This meant that we ended up taking out a standard variable mortgage because of the flexibility to make overpayments and/or pay off the mortgage early. Although the variable rate meant that we paid a higher rate of interest than was available on other types of mortgage, the money that we saved by not paying interest over many years more than compensated.

Fixed Rate Mortgages

If you want to know exactly how much you’ll pay per month, fixed rate home loan repayments stay the same during the fixed rate period.  With an interest rate rise on the cards, this could be a good time to fix a low rate. Generally, the longer the period for which you fix, the higher the interest rate. There may be penalties if you wish to over pay or terminate the mortgage before the end of the fixed term.

Tracker Mortgages

Tracker mortgages are often directly linked to the Bank of England base rate. As an example, if a tracker mortgage is set at 1% above base rate (currently 0.5%), the current rate would be 1.5%. Again, there may be penalties if you wish to over pay or terminate the montage before the end of the tracking period.

Offset Mortgages

An offset mortgage links your mortgage account to your current and/or savings account(s). This effectively reduces the balance on which you are paying interest. For this to be effective, the rate of interest paid on your mortgage needs to be higher than the rate of interest you’d earn on your savings. If you would pay income tax on interest earned on your savings, an offset mortgage avoids this. You probably need to have a fair amount of savings  to justify taking out this type of mortgage, as the rate of interest charged is generally higher than on a standard mortgage. That makes me think, why not pay a larger deposit and borrow less. However, having an offset mortgage gives you more flexibility, as you still have access to your savings.

Here are some other things to consider when looking for a mortgage.

Mortgage Arrangement Fees

With some institutions charging thousands in mortgage arrangement fees you need to factor this into your cost comparisons. As this fee is usually a fixed amount, the larger your loan, the less significant the is fee will be. Our last variable rate mortgage didn’t have an arrangement fee.

Incentives

Some banks and building societies offer exclusive rates to existing customers, but check that you can’t find a better deal elsewhere. Several financial institutions offer incentives, e.g. paying your Council Tax for the first 12 months or cashback upon completion.  While these offers may sound tempting, I’d focus on finding the best value mortgage and view an incentive as the cherry on top, versus the reason to take a loan with that institution. Saving a couple of thousand pounds in the short-term can pale into insignificance compared to paying a higher rate of interest for many years.

Length of Mortgage Term

Traditionally mortgages are taken over a 25 year term. The shorter the term, the less you pay in interest, but your monthly repayments will be higher during a shorter term loan. I read that an increasing number of homebuyers are now taking mortgages for more than a 25 year term, which I don’t think this is a good idea. Although it reduces your monthly payments, you are paying a lot more in interest over the loan term.

Size of Deposit

In most cases, having a larger deposit will mean that you can access the lowest rates. This can be difficult, especially if you are buying in an area where house prices are increasing. By the time you’ll have saved more towards a deposit, prices may have gone up by more than you have been able to save.