Thinking of moving home? It can be an exciting and stressful time, whether you’re upsizing, downsizing, relocating or just fancy a change.
There’s also a lot to think about, from working out what you can afford and choosing a home, through to making an offer, securing a mortgage and working with solicitors to do all the paperwork.
Comparethemarket.com is here to help you, though. This page will explain mortgages, how they work, the different types and how to find one to suit you.
Let’s start with the basics about what a mortgage is and how they work.
A mortgage is a special kind of loan taken out to buy property or land. They often run for 25 years, with you making a monthly payment, but the term can be shorter or longer. The bank or building society you’re borrowing from (your lender) will ‘secure’ the mortgage against the value of your home until you’ve paid it off. That’s how they can repossess your home if you can’t keep up with your payments: they sell the house and get their money back.
As with most loans, you have to pay it back with interest on top. The rates of interest can vary a lot, which is why it’s so important to compare mortgage rates.
The first step when you’re thinking about moving home is to ask yourself a question about the mortgage: “how much can I borrow?”
You will also need to pay a deposit - a chunk of money that goes towards the cost of the property you’re buying. The more deposit you have, the better, because you’ll have less to borrow and often receive better deals.
Loan to value ratio
When looking at mortgages, you might hear the term “Loan to Value” (LTV). It’s the amount of your money you’re borrowing compared to the overall value of the house. So, if you have a £20,000 deposit towards a £200,000 property, your deposit is worth 10% of the price of the property: the LTV is the remaining 90%. As a general rule, the lower your LTV, the better mortgage deals you’ll find. The cheapest rates are often available for people with a 40% deposit or more – a 60% LTV.
To get a better idea of what your new home might cost, use a mortgage calculator. There are two kinds of these. You can put in your salary, deposit and monthly outgoings to get an idea of the total loan you might be able to get. Or, with the other kind, you enter the value of the home you’re interested in, your deposit and how long the mortgage would run, and it will show you how much the monthly repayments will be.
Those repayments are important. Remember you need to be able to afford them comfortably every month, along with all the running costs of owning a home like furnishings, repairs, household bills, council tax and insurance.
Once you have found a house that you’re interested in, it’s time to do a mortgage comparison. Comparethemarket.com makes it easy to do this, but first we should look at the different kinds of mortgage that are available.
Repayment and interest only mortgages
First you need to decide if you want a repayment mortgage or an interest only mortgage. With repayment mortgages you pay off the interest and some of the overall cost of the house every month. At the end, typically after 25 years, you should have managed to pay for the whole house and the interest - you will own your home outright.
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the amount you borrowed). So after 25 years the mortgage will be outstanding.
Interest-only mortgages offer lower monthly payments, but you will need to show from the start that you have plans for how you will pay off the loan at the end of the term, so these can sometimes be harder to get in the first place.
So those are the two categories of mortgage. You then need to decide whether you want a fixed rate mortgage or one with a variable rate.
Fixed and variable rate mortgages?
Variable rate mortgages could either be ‘trackers’ where the interest rate is above, below or the same rate as the Bank of England base rate, or fully variable, where your lender decides on a rate and can change this at any time (within the conditions of the product). . Other kinds of variable are available too, like capped or collared mortgages where there might be upper and lower interest rate limits. With any of these your mortgage payments could go up or down as interest rates change.
If you choose a fixed rate, your interest rate and your monthly payments are set at a certain level for an agreed length of time. Like some variable mortgages, these are often 2 or 3 year deals, but you can also get a 5 or 10 year fixed rate mortgage. At the end of the deal you are automatically switched to another rate, usually a variable rate. But this might be a good time to compare deals again.
Whether you have a fixed or variable mortgage, it can be a good idea to shop around a little before your mortgage deal ends, and move to another one if it will save you money.
Time to compare
So that’s a summary of how mortgages work. Now it’s time to use our mortgage finder. Just enter the details of the house, your deposit and length of loan and we will list the latest offers from a wide range of providers. They will be in price order, based on monthly repayments. It’s easy to look at the different details of each offer to narrow down your options. But always read every detail before signing up – this is one of the most important financial products you’ll ever buy.