You’re in the market for a mortgage, but you don’t know where to start. You do have a vague idea of “comparison shopping,” but lenders don’t really seem to be open to the idea of negotiating. What you really need to do is hone your analytical skills. You need to dig deeper into the fine print and not rely so much on the published rates. Here’s how to do that.
Make Sure You’re Comparing Similar Mortgages
A mortgage calculator will only tell you so much. You have to actually compare apples to apples though.
Even if a mortgage calculator says that a home is a good buy, make sure you understand the “ins” and “outs” of the loan you’re getting into.
This includes various fees, the different types of mortgages, any early termination or cancellation fees, and exit charges.
Compare Tracker vs Fixed
There are two basic types of mortgages: fixed and tracker mortgages. Fixed mortgages are exactly what they sound like. The loan payment is fixed for a specific number of years. After the fixed term, the loan moves to a variable-rate that fluctuates monthly.
A variable loan fluctuates from day 1. You’ll never know what your payment will be month to month. This isn’t so bad if rates are dropping or they’re persistently low. But, if rates rise, you could end up being priced right out of your home.
Rates and Arrangement Fees
Interest rates refer to the charged assessed on the loan, while arrangement fees refer to the fee charged for originating the loan.
For example, a loan may carry a 3 per cent interest rate. This charge is based on the loan amount. So, for a £150,000 loan, the 3 per cent interest is 3 per cent of the £150,000 every year for the life of the loan. This is also sometimes referred to as an “annual percentage rate.”
By contrast, an arrangement fee is a one-time fee for the loan. These vary by quite a lot, and can range from £99 to £999.
Don’t be fooled by a low absolute interest rate either. Usually, the lowest rates come with the highest arrangement fees. You need to really add up the total interest plus arrangement fee you’ll pay over the term of the loan.
What Other Fees Will You Pay?
Some banks charge fees on top of the arrangement fee. But, usually, there are standard and customary legal fees, valuation fees, and application fees. These can add up to £1,000 or more.
Will The Lender Accept Your Application?
It’s not a given that the lender will accept your application as written. Some lenders are a bit skittish when it comes to lending money. If you earn part of your income from bonuses or commission, for example, a lender might not want to do business with you.
Other lenders are more than willing to lend you money based on uncertain income if they know an average income you make or have historical earnings you can show them.
Mortgage brokers can be your best friend when it comes to applying, since they can shop for lenders for you, help you through the underwriting process, and help minimize fees from the lender by finding one that charges the least amount given your credit score and personal financial situation.