How does a mortgage work?
Most people don’t have the money to buy a house outright, so they take out a mortgage and spread the cost. With a repayment mortgage, you put down a deposit upfront and then pay back the rest in monthly instalments, with interest.
It’s crucial that you only take out a mortgage that you can afford – both now and in the future. If you find that your financial circumstances change and you’re no longer able to make your mortgage repayments, you can get free confidential advice from Citizen’s Advice.
What are the main mortgage repayment options?
There are two main mortgage repayment options to choose from: a repayment mortgage or an interest-only mortgage. The main difference between them is how and when you pay off the balance.
They both have pros and cons depending on your personal financial circumstances.
What is a repayment mortgage?
This is the most common type of mortgage. With a repayment mortgage you make monthly instalments that chip away at both the outstanding loan balance and interest. By the time you reach the end of the mortgage term, you’ll have repaid the mortgage in full.
What is an interest-only mortgage?
You usually have lower monthly repayments with an interest-only mortgage because you’re only paying off the interest – not the loan amount you borrowed. At the end of your mortgage term, you will need to pay the remaining balance as a lump sum.
So, it’s important to set up a savings strategy before you apply for an interest-free mortgage. That way, you’ll be able to show the lender that you can afford to clear the balance in full once the mortgage term ends.
Where can a mortgage be obtained?
- go direct - you can get a mortgage directly through a bank or building society by going on their website of in branch
- use a broker – brokers (like Ocean) compare deals from different lenders to find you the most suitable one that you’re eligible for. They can sometimes have access to deals which aren’t available through mainstream lenders. Bear in mind that some brokers will charge a fee for their services
- check comparison websites - you can compare deals easily using comparison websites – however not all lenders will be included, so remember to go direct too
How to compare mortgage deals
When shopping around for a mortgage deal, it may be useful to ask yourself the following questions:
1. Do you want a repayment or interest-only mortgage?
An interest-only mortgage might be suitable if:
- you want to make low monthly repayments
- you know you can save enough money to pay off mortgage in full at the end of the term
A repayment mortgage may be suitable if:
- you’d rather pay your mortgage off gradually in monthly instalments
- you don’t think you’d be able to save up sufficient funds to pay for your mortgage at the end of the term
2. Do you want fixed or variable interest rates?
If you have fixed interest rates on a mortgage, your repayments can’t go up or down during the agreed fixed interest rate period. This can be helpful when it comes to budgeting.
Variable interest rates usually begin lower than fixed rates because there is more risk involved for the buyer. For instance, interest rates can go up or down – so you could either end up paying more or less in interest. For some, the risk may pay off, but others may be left out of pocket.
3. Do you want flexibility?
Consider if you want the flexibility to:
- overpay your mortgage to clear it off sooner, without facing charges
- take a payment holiday
- move mortgage providers without being charged high early repayment charges
If any of these options could apply to you, you should find a provider who offers you flexibility. Research all of the hidden costs before making a decision so you don’t get caught out later on.
4. Do you want to be able to roll mortgage fees into your mortgage?
Mortgage providers charge fees when you initially set up your mortgage. If you can’t afford to pay these fees straight away, some lenders will allow you to add some or all of them into your repayment plan. You’ll need to make sure you look at providers who offer this option if you want to roll mortgage fees into your mortgage.
Bear in mind you’ll pay interest on these fees if you don’t pay them straight away, so you could end up owing more money in total.
Do I get a mortgage before making an offer?
You don’t need to get a mortgage before making an offer on a house. In fact, you won’t know exactly how much you need to borrow before you negotiate a price.
However, some real estate agents will want to see your mortgage in principle before they allow you to make an offer. It proves to them that you’re a serious buyer, so it’s worth getting one before you start house hunting.