A mortgage sounds simple on the surface. It is a loan to fund a property – usually over 25 years – but the complexity of the market means there are many facets to choosing the right deal. Simplify things with a mortgage calculator.
A mortgage is most commonly used to finance a residential property you live in, but you can also get an overseas mortgage for a home abroad and a home loan for an investment property you plan to rent out, known as a buy-to-let mortgage.
As well as picking the cheapest mortgage for your needs, the key decision is whether to get a fixed rate or a variable mortgage. Here is how they both work:
With a fix, payments don’t change during the introductory period of typically between two and five years. It is possible to get longer-term fixes but they are rare. Our mortgage calculator can let you know what this fixed rate will be.
After the fixed period, you usually revert to your lender’s standard variable rate (SVR). This is always a few percentage points above Bank of England base rate, and moves up or down roughly in line with base rate.
There are two types of variable rate mortgage: a tracker or a discount. A tracker precisely tracks the Bank of England base rate during the introductory period, but at a margin above (for example, base rate + 2%). Then, it usually reverts to the SVR.
Some trackers are available for the life of the loan, of usually up to 25 years, so stay at the same level above base rate until you pay it off, switch or take an equity release loan.
A discount is simply a discount off the lender’s SVR; for example, SVR minus 2%. It sounds complicated, but things become much easier to digest with our mortgage calculator.
You must also decide whether to get a repayment or interest-only deal. The former means repayments cover the loan and interest, while the latter only covers the interest, so you must save separately to pay off the loan.
You can also take an offset mortgage where your savings reduce the interest paid. On a £100,000 loan with £20,000 savings, you only pay interest on the £80,000 difference. Our mortgage calculator takes this into account.
Yes – the mortgage calculator can do this but don’t just consider the rate. Always factor in the huge array of mortgage fees, such as application, legal, valuation and exit charges.
You are not stuck with one loan forever. In fact, it is often wise to switch at the end of an introductory period, known as remortgaging. Do the sums first to ensure it’s worth switching as a wrong decision could cost you thousands of pounds.
You’ll now need a reasonable deposit or own a decent chunk of your property outright, though exactly what you need changes, depending on the economic climate.
Before the credit crunch in 2007, you could get a mortgage with no deposit, but during the height of the crunch you needed at least a 25% deposit as criteria became stricter. This makes it all the more important to use a mortgage calculator and really plan out your repayments.
Another factor is your credit rating. If you often miss credit card, loan or mortgage or payments, you may be denied a mortgage or may have to pay a higher rate. Bad credit mortgages are often called sub-prime or adverse credit deals.
First-time buyers, however, usually require squeaky clean credit records. A mortgage calculator is even more useful for those with less experience in this area.
You’ll also need to prove your income, in most cases. If you are an employee this is simple as you’ll only need to show pay slips. If self employed, you’ll normally need at least two years’ tax returns or company accounts.
For more information, see our guide to how to get a mortgage.
The best way to apply for a mortgage is via a broker. If he or she isn’t using a mortgage calculator, you should probably avoid them.
The advantage of using a good broker is you’ll get advice on the best deals. This help can prove invaluable due to the complexity of the mortgage market as there a multitude of factors to consider before picking the best deal.
A broker can also pick from the hundreds, and sometimes thousands, of mortgages available so you don’t need to shop around yourself. Of course, with a mortgage calculator you can do your own research as well for peace of mind.