10 steps to your perfect mortgage

Choosing the right mortgage could save you thousands of pounds and mean you own your home in a shorter space of time. Here are 10 steps to help you find the mortgage that works best for your finances.

Updated on 19 May 2015.

happy couple in new home

For most of us wanting to get onto the property ladder taking out a mortgage is the only feasible option. It is also likely to be the biggest financial commitment you make during your working life.

The mortgage deal you get will have a huge impact on both your monthly repayments and the amount you pay for your property overall, so searching for the best mortgage possible is an essential task.

But what exactly do you need to check before you sign on the dotted line?

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Here's how to make sure you choose the best mortgage deal for your circumstances.

What is a mortgage?

Simply put a mortgage is a large loan that is secured against your home.

This 'security' means that if you fail to keep up the repayments on your mortgage your lender can sell your home to get their money back.

This is the main difference between a personal loan, or unsecured loan, and a mortgage, which is classed as a secured loan.

1. How much can you afford to borrow?

Before beginning your search for a mortgage, you will first need to take a hard look at your finances to see exactly what you can afford.

Most mortgage lenders will allow you to borrow up to 3 or 4 times your annual salary (or 2.5 times your joint salaries), depending on your circumstances and credit rating, giving you a rough idea of how much you might be able to borrow.

You can use an online mortgage calculator to see how much monthly payments might be for this amount, however try to remain realistic as to what you can afford to pay back each month.

Remember, because a mortgage is secured against your property if you fail to pay your home can be re-possessed by the mortgage provider.

2. Work out your LTV

The loan to value or LTV you need to borrow will play a big part in determining the mortgage deals you're eligible for and how expensive your mortgage will be.

You can calculate this by comparing how much you need to borrow (your loan) against the current market value of the property (the value).

Taking some simple figures, if you have a 5,000 deposit and need to borrow 95,000 to buy a property worth 100,000, your loan to value would come out at 95%. As such you would need to compare 95% mortgages when it came to searching for a deal.

First time buyer mortgages often offer a higher LTV to try and help borrowers get on the property ladder, but chances are you will still need a sizable deposit - 100% mortgages of the past are no longer available to new customers.

In general, high loan to value mortgage and first time buyer mortgage rates are often higher than for other mortgage deals.

The lower the LTV, the better the mortgage rates available to you, so if you are just on the threshold of a lower LTV it may make sense to wait a few months and look again when you can access the lower rates, or use some of your savings to reduce the amount you need to borrow.

3. Choose between Repayment and Interest Only mortgages

There are two main types of mortgage, repayment and interest only and before you start looking for mortgage deals you should decide which type of mortgage best suits your needs.

Repayment mortgages

Repayment mortgages are the most popular type of mortgage deal.

They work in the same way as most other loans in that your monthly payments are split to pay off interest you owe on your borrowing and part of your outstanding mortgage.

This means that each month your mortgage debt is slowly reduced until you are mortgage free.

Interest only mortgages

Interest only mortgages are designed to run alongside a separate investment or savings plan that you will ultimately use to pay off your mortgage.

This is necessary because your repayments are only used to cover interest on your borrowing, they aren't used to reduce your debt.

As such your outstanding balance stays the same throughout the mortgage term and you still need to find the money to pay off your mortgage before you actually own your home.

In the past many people have viewed taking an interest only mortgage as a good way to get on to the property ladder, as your monthly repayments may be lower than if you took out a repayment mortgage.

However, although your repayments may be lower, you wouldn't be reducing your debt to the bank and increasing your stake in your property. You would also need to put the money you 'save' each month in a suitable investment so that you have it available once you want to repay your home loan.

Some people decide to opt for an interest only mortgage because they feel that they can get a better return through investing the money that would be used to pay off the balance of their mortgage. However, to make this worthwhile you would have to be disciplined in saving the extra money and be confident that it could perform well in the stock market, making this type of speculation quite risky.

4. Decide on your length of term

Mortgage term

When you take out a mortgage you can choose how many years you want to spread your repayments over.

The aim is to go for a mortgage term that strikes a balance between clearing your mortgage as soon as possible (so you pay less in interest) and making your monthly repayments affordable.

In general the longer the mortgage term the greater the amount of interest you will pay, not to mention that you will have to continue to make monthly repayments for a longer period.

However, when considering the overall length on your mortgage, you will also need to weigh up the monthly cost to make sure that it stays affordable.

If you choose a mortgage which allows you to overpay at no charge you will also have the flexibility to shorten your mortgage term by paying extra off your balance when you can afford to.

Mortgage deal term

Although your mortgage may take 25 or 30 years to pay off in full, you are likely to be able to take out several different mortgage products or 'deals' during this period.

A mortgage deal is essentially an agreement on the type of interest you will be charged on your mortgage for a set period - usually for between 1-5 years.

A 2 year tracker, 5 year fixed or 3 year discount mortgage are all examples of different mortgage deals.

When considering the length of your mortgage deal you will need to consider how interest rates are expected to change, what sort of stability you need and how often you want to look for a new deal.

After your mortgage deal ends you will be transferred to your lender's Standard Variable Rate until you agree a new product. This rate is set by your lender and is linked to the Bank of England base rate and several other market factors, most importantly it tends to be more expensive than the mortgage deals on offer at the same time and can fluctuate without warning.

For more help deciding on what term to choose, read our guide Long Term vs Short Term mortgage deals.

5. Pick a deal - Fixed, tracker or discount?

Once you've decided how you want to repay your mortgage, you will then need to work out which type of mortgage deal best suits your circumstances.

This will determine how you will be charged interest during the term of your mortgage deal, the rate of interest you'll pay and ultimately how high your monthly repayments will be.

Three of the most common mortgage deals are Fixed, Tracker and Discount mortgages.

A fixed rate mortgage will set both the rate of interest applied to your borrowing and your monthly repayments at a certain level for a number of years.

The rate of interest you'll pay on a tracker mortgage will follow a fixed percentage above the Bank of England base rate for the deal term and your repayments will fluctuate accordingly.

A discount mortgage will give you a percentage discount on your providers Standard Variable Rate for a fixed period. Again, your repayments will fluctuate over the deal term if you take out this type of mortgage.

Each of these mortgage types have pros and cons, for a more detailed breakdown of the pros and cons of each mortgage read our guide Fixed, Tracker or Discount Mortgage?

6. Rate hunt

After deciding what type of mortgage deal suits your needs, your next step should be to compare mortgage rates.

You should compare various mortgages deals from as many different providers as possible to find the best rate available that fits your needs.

You can use our whole of market mortgage comparison table to search all the deals currently available - the Advanced Search will help you to narrow down your options to deals that meet your criteria.

Check how different interest rates will affect your monthly repayments, perhaps using an online mortgage calculator to help with the maths.

7. Check the mortgage fees

On top of standard mortgage rates you may also have to pay other upfront fees when you take out a new mortgage deal.

These can be anywhere from as little as 99 to anywhere up to 4,000 so make sure you check exactly what you are expected to pay and factor this into your calculations.

Some mortgages including many first time buyer mortgage deals will offer fee free mortgages, however, make sure that the rate you are offered is still comparable to other mortgages to check you are not losing out elsewhere .

If you will incur upfront fees you may be given the option to add them to your mortgage. While this might save you paying more in one go it will mean that it will increase your outstanding mortgage and most importantly will cost you more in interest charges.

If you can afford to, paying your mortgage fees upfront will save you money.

8. Is it flexible?

Many mortgages are very strict in their repayment conditions and can penalise you for deviating from your agreed monthly amount -whether this be over or under what you have agreed to pay.

However others are more flexible and include extra features that could make your life much easier further down the line.

Flexible overpayments

As already mentioned being able to pay a bit extra off your mortgage each month can not only help you pay it off sooner, but also save you money in interest.

Check to see if the mortgages you are considering allow you to overpay each month and by how much. You may also want to check if you can pay a lump sum off your mortgage without being penalised.

Payment holidays

Being able to over pay your mortgage can be a great way to save money, but being able to take a repayment holiday could prove crucial should you fall on hard times.

A repayment holiday allows you to stop your monthly mortgage payments for an agreed length of time and can be ideal if your circumstances change and your find yourself short of cash.

However, you should only take a repayment holiday on your mortgage if you are struggling to meet your monthly repayments as you will continue to accrued interest on your mortgage during the payment break.

9. Can your mortgage move home with you?

If you think that you may move home at some point then you should also check whether you can move your mortgage with you.

If you can't then you may incur early repayment fees and then possibly new application fees for the mortgage on your new mortgage - adding to the cost of moving considerably.

10. Are you free to pay it off early?

Being able to pay off your outstanding mortgage in one foul swoop may be very satisfying, but it could also prove costly or simply not be possible with certain mortgages.

If you feel that you may be able to pay your mortgage off early, make sure to check each mortgages terms and conditions to see if you are able to do so without paying hefty charges.

A deal that enables you to clear the balance without paying Early Repayment Charges will also give you the flexibility to switch to a different mortgage deal mid-term should you wish. You should bear in mind that these are relatively few and far between, however.

Other types of mortgage

In certain circumstances you may need to consider a more specialised type of mortgage rather than a standard residential mortgage.

Buy to let

If you will be renting out your property to a tenant then you will need to choose a buy to let mortgage. The reason for this is that Buy to let mortgages are assessed on the potential rental income from a property rather than your own personal income.

For a more detailed explanation read our Buy to Let Mortgage Guide .

Self Build

A self build mortgage is the only type of mortgage that lends you money without Identifying a property, the reason for this - because you plan to build one yourself!

For more information read our Self Build Mortgage Guide .

Seek advice

If you are unsure what type of mortgage will best suit your circumstances you can seek independent financial advice from a qualified broker.

You can use our mortgage enquiry form to find an independent, whole of market mortgage broker in your local area so you get the best advice possible.

Written by at money.co.uk

Compare Mortgages
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs by comparing the best rates available.
Compare Mortgages

Further reading...

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With the cost of renting almost the same as paying a mortgage, it can be an uphill struggle to save a deposit. We look at how you can buy your own home and get a foot on the property ladder instead.

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A revamped Right to Buy scheme offers council tenants in England up to 77,900 (or 103,900 in London) off the market price of their council home. Here is what you need to know about the scheme.

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The excitement of taking out a mortgage to buy your first home has long passed, but could you be closer to paying off your mortgage than you think? We explain what affordable steps you can take to clear your mortgage early.