Finding the right mortgage is much like finding the perfect partner. There are certain attributes or traits in a prospective partner or mortgage that makes compatibility more likely.
A financial comparison website therefore, is much like an internet dating site. You can compare mortgages on a range of things: rate, fees, term, hobbies, favourite tree as well as attitudes to particular issues (like the Great Reform Act of 1832).
But this mortgage dating game leaves me baffled. It all pre-supposes that I know what I’m looking for – which I may not do. This partly explains my ill-fated relationship (lasting 24 months) with Magda, a 2 year fixed rate mortgage, who, although enjoying hill-walking, was completely inept socially and very unreasonable (she would only travel by Penny Farthing and insisted on wearing a monocle).
What I really needed, before looking for a mortgage, was to work out what would be compatible with me. Probably the biggest piece of advice I could give is to make sure you shop around. I settled for Magda because she was the match my bank offered me, but selecting from a limited pool is the dating equivalent of having to select your partner from within a small familial group, such as The Nolans or The Chuckle Brothers. Whilst you might well find a perfect match from your bank or building society, surely it is far better to have seen everything else that is on offer as well? This simple exercise could save you hundreds, even thousands of pounds a year in mortgage payments.
But before you start out in the labyrinthine world of mortgage dating, here’s a rundown of key things you need to have clear in your own mind:
- Introductory Rates. Probably the single most important consideration when selecting a mortgage. The dating equivalent is as important as a partner’s opinion of the Second Great Reform Act of 1867. With mortgages there are two types of rate: fixed or variable. Put simply fixed won’t change, but variable might. Fixed rates give you more security (as you know what you’ll be paying for a set period) but tend to have higher fees.
What are the risks?
The risk with a fixed rate is that interest rates will drop but that your rate doesn’t, meaning that you have to fork out the same each month whilst those on variable rates enjoy lower payments.
The risk with a variable rate is that if rates rise you will pay a lot more for your mortgage. For instance, if your rate increased from 4.00% to 5.00% it could cost you up to an extra £83 per month on a mortgage balance of £100,000!
I remember waking up one day and finding Magda much less attractive. Rates had dropped considerably you see, and she just didn’t look the same. My friends with variable rates were having parties – some even went on holiday. I stayed at home. Slowly, barely perceptibly, I grew ever more resentful of this attractive 2 year fixed rate that had seemed such a good idea at the time, but who now, in the cold light of day, appeared a different mortgage altogether.
But there’s no right or wrong choice. Whilst I picked Magda, my friend picked Tomasz, another 2 year fixed and has been very happy (these names are quite unusual for mortgages – the majority are actually either called Tarquin or Ursula).
- Term. The next thing you need to think about is how long you would like the introductory deal to be. For a fixed rate this is important as it is usually the case that you are “tied in” to your mortgage for the introductory period, meaning you may have to pay an early repayment charge if you want to switch deals or repay the balance in full. There may be a tie in for a variable rate mortgage as well though so check Section 10 of any Key Facts Illustration you are given to find out what, if any, Early Repayment Charges are payable. As with rate there is no right or wrong choice. You may want to fix your rate for three years so you know what you are paying while you are supporting your child through university, or you might be planning to repay your mortgage at the end of five years when you sell some shares. The point is: have a plan. Don’t be constantly remortgaging every two years just because that’s what you think everyone else does. This is your mortgage, select it based on your requirements.
- Set up costs. How much it costs to set up your mortgage can be a deciding factor in the deal you end up choosing, particularly if you are remortgaging. There are usually fees to pay for arranging the mortgage, a valuation fee and legal fees (there may be other additional costs such as Stamp Duty if you are purchasing a house). If you want to try to minimise the payment of any upfront fees, there are deals that offer this (although be prepared for this to be at the expense of a higher rate).
Flexibility. I wish I had chosen my mortgage based on how flexible it was. Flexible mortgages can allow you to:
Overpay – where you can pay over and above your monthly payment, either as a regular payment or as a lump sum. Watch out though, a lot of mortgages will cap the amount you can overpay each year.
Check Section 11 of any Key Facts Illustrations to find out any restrictions set in place by your intended mortgage.
Underpay – where you can pay less than your monthly payment for a period. This is normally dependent on you having previously built up enough overpayments and will be subject to your lender’s approval.
Payment Holidays – where you can take a break from your monthly payment for a period. As with underpayments this is usually subject to previous overpayments having been made and subject to the lender’s prior approval. Remember that interest will continue to be charged if you take a payment holiday which will increase the amount that you owe.
Borrow Back – if you decide to overpay, you may have the option to “borrow back” the money you have overpaid. However, there will normally be a minimum amount that you have to withdraw and you will need to get your lender’s agreement.
The thing I really disliked about Magda was that she was so inflexible. She wouldn’t let me overpay, and she didn’t like me going out with my friends, unless they rode bicycles built before 1890 or disagreed entirely with the provisions of the Second Great Reform Act.
- Offset Mortgages. Mortgages aren’t the only financial products that you can date online. No you can also date Savings accounts. Sometimes a mortgage may also be in a relationship with a savings account. When this happens you get an Offset mortgage. Offset mortgages are great. They allow you to put your savings into an account and reduce the interest charged on your mortgage. This usually saves you a packet as mortgage rates tend to be a lot higher than what you would have earned on your savings. So this type of mortgage might be is worth considering if you have a large pot of savings that aren’t working very hard for you.
All of this said, what any relationship is built on is compromise. Don’t be upset if your mortgage doesn’t have everything you want, just make sure that it ticks enough boxes to match your requirements. Unfortunately Magda and I had irreconcilable differences and have now separated. I don’t have much contact with my estranged mortgage and, although she still calls occasionally, I tend not to answer. I’m now very happy with Ursula, a lifetime tracker.
Still in doubt? Use a mortgage matchmaker.
You may have never looked at it this way, but Independent Financial Advisers and Mortgage Brokers are the Cilla Black of the mortgage world. They will take down your requirements and help you understand your financial needs, then compare the best mortgages for you. They do ask a lora lora questions, but can be very worthwhile if you are having trouble working out which mortgage would be your perfect partner.
Moneyfacts.co.uk is the leading independent financial information provider in the UK. Since 1988, we’ve been providing impartial information to financial services professionals which has helped thousands of customers get the best deal on their mortgages, savings accounts, credit cards, loans and other personal finance products.
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