Choosing the right mortgage could save you thousands of pounds in the long run. Knowing how to find the best deal possible can make a huge difference to your financial future.
But with so many products out there, where should you go to find a mortgage? And, how do you know that you've got the best deal?
We're not going to tell you that finding the absolute best rates for your home purchase isn't going to require some leg work, but we can guarantee that it'll be worth it. Even if you only follow some of these steps, you'll be on your way to finding a good mortgage product.
Before you dive into deal comparison sites, and start calling up mortgage brokers, there's a few things you should figure out first:
The exact amount you'll be able to borrow will vary from lender to lender, but as a general rule, most will only let you borrow a maximum of 4.5 times your annual income (whether that's individual, or combined income).
On top of the total sum you're able to borrow, it's important to also think about monthly repayments. Whilst you might technically qualify for a large loan, it's not a sustainable financial decision if you can't keep up with your monthly repayments. If you can't keep up repayments on your mortgage, your home may be repossessed.
There are lots of online mortgage calculators available which can give you a general sense of how much you'll be able to borrow in total, and what your monthly repayments might look like. Have a go with a few of these, to get an idea of what's feasible, financially, for you.
The percentage of a property's value that you can pay upfront will have a huge impact on the types of mortgage rates available to you. The higher the percentage you can pay as a deposit, the better rates you'll be able to access. Conversely, if you only have a small deposit, you should expect to pay a higher interest rate on your loan.
Think carefully about the maximum amount you can use as a deposit (taking into account the other costs of buying or moving house too).
While buying a new house might not seem like the natural time to think about how selling up in the future, it is important to think about the long term when applying for a loan like a mortgage. Many mortgage lenders charge large 'early repayment fees' if you decide to sell within the first few years of taking their mortgage agreement out - sometimes up to 5% of the loan's value. If you're looking to move in less than 5 years time, look for a mortgage with a short fixed term period, so that you can avoid having to pay these fees.
A good mortgage is made up from a mixture of things. The best mortgages will meet all your particular criteria in each category:
Your loan's interest rate will impact how much you pay towards your mortgage each month - and how much you'll end up paying back overall. While many lenders show an APRC rate (an averaged rate for the entire term), the most important figure to look out for is the rate during the initial fixed term.
Most mortgage lenders will require you to pay some upfront fees to cover the costs of arranging the mortgage loan. Usually this will consist of an arrangement fee (anywhere up to £2,000, or a small percentage of the loan value), a valuation fee, and legal fees.
There's a large amount of variation in upfront fees, so make sure to take a close look at the particulars of each offer. Often higher upfront fees correlate with a lower interest rate. Weigh up carefully whether the low interest rate cancels out the upfront cost, and visa versa.
The fixed term period is the amount of time you'll pay the initial interest rate, before moving onto the lender's standard variable rate. This period usually lasts between 2 and 5 years, but can be as long as 10 years. The 'fixed rate' is generally much lower than the standard variable rate, and has the added advantage of remaining the same throughout the stated period. Many people decide to remortgage once their fixed term has come to an end.
Mortgages with longer fixed terms are great for financial planning and stability, but are generally accompanied by higher interest rates. And, if you do decide to sell before the fixed term has ended, you'll have to pay large penalty fees.
While all mortgage lenders have rules about who they can lend to based on income, most also have conditions about the types of properties you can borrow money against. For example, common conditions include: no new build properties, no mixed-use properties, and no holiday-lets. Knowing what sort of property you're looking to mortgage before you look for a deal will reduce the chances of you being rejected by the lender later on.
APRC stands for Annual Percentage Rate of Charge. It's a figure that represents the average interest rate you'd pay over the entire mortgage term.
By law, all lenders have to tell you the APRC, but it's not necessarily the best indicator of how good a mortgage interest rate is.
Why you shouldn't use APRC to find the best mortgage deal...
Because it's an average of your fixed term rate, and the standard variable rate, the APRC represents an interest rate you're very unlikely to ever pay.
Because standard variable rates are more expensive and unreliable than fixed term rates, most people will remortgage once their fixed term period comes to an end. If you're planning to do the same, working out the amount you'll pay during the fixed term period, plus any upfront fees, is a much better way of figuring out how good a deal you're getting.
Just as the name suggests, standard variable rates are liable to change. This is because they generally follow in line with the Bank of England base rate. When the base rate increases, lenders increase their interest rates too. This means that the SVR when you apply, isn't necessarily representative of the amount you'll actually end up paying when your fixed term ends.
Once you've figured out what you need from a lender, and what makes a 'good' mortgage, the hard work starts.
There are three steps to ensuring you find the best mortgage deals:
We'll go through each stage in detail.
There are lots of online tools out there that help you find and compare mortgage deals. Many will also allow you to filter results by the specific conditions you're after too, such as: the loan to value (the percentage of the property value you'll want covered by the mortgage), or the type of property you're buying.
These online comparison tools are often free. However, most won't be able to show you all of the mortgage products available on the market. Some deals are only available through mortgage brokers, or direct from the lender themselves.
That doesn't mean online comparison isn't useful, though. We'd recommend testing out a few of these online calculators to get a sense of what sort of mortgage rates are normal for the type of product you're after, and to see what the best rates might look like.
Once you have a general sense of the mortgage deals available, it's time to talk to a mortgage broker. Not only will they be able to talk to you about deals that are only available to brokers, they'll be able to give you advice about which lenders and products you're actually eligible for.
Some brokers will also be able to apply to a lender on your behalf. This not only improves your chances of being accepted, but also provides you with extra protection should anything go wrong. If your broker gives you advice that turns out to be wrong, you may be able to seek recourse with the Financial Ombudsman.
There are three main types of mortgage brokers. Each offers a slightly different service, so it's worth asking providers which category they fall into before you decide whether to work with them:
These mortgage brokers will only be able to show you deals from a small group of lenders. You may get some exclusive deals, but you'll have to compare with deals from other brokers if you want to get a good sense of whether they're the best option or not.
These brokers will only show mortgage products that aren't offered directly to the public. The main reason for this is because they operate on commission, which they can only earn through the broker-exclusive mortgage products.
Some mortgage brokers check both broker-exclusive and direct to consumer deals. These types of broker are much more likely to charge a fee for their service, and, if you choose to apply for a 'direct to consumer' product, they may not be able to submit an application on your behalf.
Remember: it's unlikely that a single broker can guarantee you access to every mortgage, as some deals are exclusive to specific brokers, and some lenders refuse to work with brokers at all. However, there's no rule stopping you talking to more than one broker before you decide who to go with.
Getting a commission payment from a bank or lender is one of the most common ways for mortgage brokers to earn money. Generally this, 'procuration fee' will be roughly 0.35% of the loan amount - but it shouldn't affect the overall cost of your mortgage.
It's your mortgage broker's legal obligation to tell you the exact amount they'll be paid in commission before you apply for a mortgage through them.
Some mortgage brokers will charge you a fee either on top of, or instead of, commission from mortgage lenders. Generally these will be the brokers that have access to the widest range of products.
Not necessarily. Just because a broker is making commission, doesn't necessarily mean they aren't showing you the best deals.
Rather than choosing between a fee or a commission mortgage-broker, it's better to think about brokers in terms of the complete service they offer. Consider how much of the market a broker covers, and whether they offer the option to apply on your behalf. These factors are more important than how your adviser is paid.
You may however, choose to work with more than one broker. In this case, you may decide it's more financially sensible to work with broker's that earn money through commission, rather than having to pay multiple brokers' fees.
When you're thinking about which mortgage broker to use, take a look at the following factors:
Although it's pretty standard for a mortgage broker to charge a fee, or collect commission, watch out for really high fees. A broker shouldn't charge you, or the mortgage lender, more than 1% of the mortgage value.
Look carefully at what type of service each broker provides - in particular how much of the market they search, and whether they have particular specialisms that could be useful. Sometimes it's worth paying a fee for highly-experienced brokers if you're purchasing a property that'll need a specific type of mortgage, like a buy-to-let.
Before deciding to work with a particular broker, double-check that they are qualified and regulated. The most common qualification is called CeMAP. Reputable mortgage advisers will be regulated by the Financial Conduct Authority (FCA).
Once you've talked to a mortgage adviser, the final step to finding the absolute best mortgage deal, is to look at the mortgage products that won't show up in a broker's search.
This stage is worth doing regardless of your progress so far, but is particularly valuable if found a mortgage deal during your initial online comparison search that was better than those offered to you by a broker.
While this part of your mortgage search is the most time and effort intensive, if you manage to find the right deal, all of the extra work will be worth it.
Some banks, and many building societies, don't work with mortgage brokers at all. This means that if you want to see their deals, you'll need to enquire with them directly. These lenders include: Yorkshire Bank, and First Direct.
To make things more complicated, there are a few lenders who offer some of their deals through a mortgage brokers, and some of their other products only if you go to them directly. It can be worthwhile approaching some lenders directly to see what deals they have available, before you decide whether to apply through a broker or not.
Beyond researching the top rates available for you right now, there are some personal changes you can make to ensure you're going to be able to access the best mortgage products on the market.
Whether that's getting rid of debt, or demonstrating your ability to handle credit responsibly, improving your credit score is one of the best ways to improve your chances of being able to access low mortgage rates. This is because your credit score impacts your lender's confidence in your ability to repay the mortgage back. For tips on ways you can improve and check your credit score, head here.
If you're able to increase the amount you put down as a deposit, you're more likely to secure a lower interest rate. At the time of writing, most of the best mortgage rates are limited to those who are able to put forward 40% of the value of the property, upfront. This is because the higher the deposit, the lower the risk for the bank.
Mortgages with short fixed terms tend to have lower interest rates. If you're willing to take on a little more financial risk, considering a shorter fixed term period could help you secure a lower interest rate. Just remember to remortgage as soon as you hit the end of the fixed rate term period, so you don't end up paying the higher standard variable rate.
If you don't have a lot of spare cash, it can be possible to add fees (such as your mortgage broker fees) to your mortgage balance so you don't have to pay it upfront. However, you'll have to pay interest on anything you add, so you'll end up paying significantly more in the long run.
Interest rates vary depending on a range of factors, such as: the type of buyer, the fixed term period, size of deposit, so it's hard to give a single figure for 'what is a good mortgage rate'.
Currently the Bank of England base rate is very low, so mortgage interest rates are also generally pretty low too.
According to moneyfacts.co.uk, the money comparison website, the best interest rate available in the UK at the time of writing is: 0.93%. This rate is for a 2 year fixed term mortgage, and only for those with a 40% deposit.
The best mortgage rate for first time buyers in the UK, at the time of writing is: 2.29%. This rate is for a 2 year fixed term mortgage, and requires a 10% deposit.
These rates represent what is available to borrowers with excellent credentials, from lenders with strict eligibility criteria. We'd expect an 'average' to 'good' mortgage rate to hover slightly higher than these rates.
If you have a small deposit and require a very high loan to value mortgage, such as 95% LTV, you're unlikely to get a better interest rate than 3.5%.
While interest rates, upfront fees, and fixed term periods are all important indicators of how good a deal you're getting, there are also some things you should be a little wary of when looking at potential mortgages - even if on the surface they look like good incentives.
Some mortgage providers might offer life or home insurance as an extra alongside your mortgage. While rates might look good upfront, we'd recommend that you consider very carefully if it's the right option for you. You'll be stuck with whatever price hikes your mortgage lender imposes each year for the duration of your mortgage.
Cash back is always appealing - particularly with all the upfront costs that come with buying a home. But usually, the cash back offered by mortgage providers is a very small amount in the long. Consider it a 'nice to have', but not worth choosing a mortgage for - especially if you'll get better rates by going elsewhere.
Payment Protection Insurance can be a useful policy - it will cover your mortgage payments in the event of injury, job loss, or illness. However it can be expensive and difficult to actually use. During the coronavirus pandemic, for example, many MPPI providers removed the 'unemployment' claim option from their products. There are often stringent criteria for claims, so read the conditions extremely carefully before you decide whether it's right for you.
It takes a bit of time for mortgage lenders to process your application, check out your credit history, and perform a valuation of the property you're looking to buy.
Because of this, the best time to apply for a mortgage is 3-6 months before you actually need it. This will give you enough time to shop around for the best deal, and prevent delays with your property purchase.
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