With a fixed rate, you know exactly how much you will have to pay out each month, so you don't need to worry about fluctuations in interest rates. However, this also means that your monthly payment will stay the same during the fixed period, even if other interest rates decrease. Typically, you can fix your mortgage for two, three or five years and some lenders offer longer term fixed rates of ten years or more. It is important to be certain of how long you want to commit to your mortgage. Many lenders will charge you a penalty – known as an early repayment charge (ERC) – if you repay the mortgage before the end of the fixed rate term. The interest on fixed rates tends to be slightly higher than variable rate mortgages due to the security of knowing that your repayments won’t change (even if the Bank of England changes interest rates).

The main types of variable rate mortgage are Standard Variable Rate (SVR), tracker and discount. Each lender sets a SVR, which is the normal interest rate it charges homebuyers. SVR interest rates tend to be higher when compared to other types of variable rate mortgage. However, there isn’t usually an early repayment charge so there can be an advantage if you are looking for flexibility in the short term. When a fixed, tracker or discount deal comes to an end, you are usually transferred to your lenders SVR so this can be a good time to review your options. Tracker variable rate mortgages are linked to a rate such as the Bank of England base rate and move in line with their changes. So, if the Bank of England puts the base rate up by 0.25%, your mortgage rate will rise by the same amount. The other type of variable rate mortgage is a discount. Discount mortgages are linked to the lender’s SVR, not the Bank of England base rate. SVRs are set by each lender and therefore can change even if there has been no change in the Bank of England rate. Variable rate mortgages can offer the lowest initial interest rates. However, repayments are not fixed so you will need to make an allowance for the possibility of fluctuating payments when planning your monthly budget. Some lenders combine different types of mortgages. They might combine a fix and a tracker, or offer some sort of guarantee that a variable rate loan will not rise above a certain rate.

Budgeting and getting the right mortgage

Types of mortgages

Before you start looking at properties, you need to know how much you can spend. If you are not buying for 100% cash, you are likely to require a mortgage to buy your property.

Mortgages are loans offered by banks, building societies and other lending institutions, which can take many years to repay. The repayment term is normally determined by the size of the mortgage and what you can afford to repay each month.

Contacting a mortgage consultant

At your earliest opportunity you should take time to speak to one of our professional mortgage consultants who can advise you on a range of products from across the mortgage market. They will work out what the maximum is that you can borrow and which lender is likely to agree to it if required.

They may suggest getting an Agreement in Principle (AIP), where they will approach an appropriate lender with your details to see if they will lend the required money, subject to the usual checks. Credit checks are carried out during this exercise so you must be careful not to negatively affect your credit rating. Your adviser will be able to explain this to you in more detail.

Most importantly, your adviser will assess whether the mortgage you are thinking about is affordable for you using a detailed budget planner. There are many factors that need to be taken into account including your income, any debts you may have (e.g. loans and outstanding credit card balances) and how you manage your finances.

With a fixed rate, you know exactly how much you will have to pay out each month, so you don't need to worry about fluctuations in interest rates. However, this also means that your monthly payment will stay the same during the fixed period, even if other interest rates decrease.

Typically, you can fix your mortgage for two, three or five years and some lenders offer longer term fixed rates of ten years or more. It is important to be certain of how long you want to commit to your mortgage. Many lenders will charge you a penalty – known as an early repayment charge (ERC) – if you repay the mortgage before the end of the fixed rate term.

The interest on fixed rates tends to be slightly higher than variable rate mortgages due to the security of knowing that your repayments won’t change (even if the Bank of England changes interest rates).
The main types of variable rate mortgage are Standard Variable Rate (SVR), tracker and discount.

Each lender sets a SVR, which is the normal interest rate it charges homebuyers. SVR interest rates tend to be higher when compared to other types of variable rate mortgage. However, there isn’t usually an early repayment charge so there can be an advantage if you are looking for flexibility in the short term. When a fixed, tracker or discount deal comes to an end, you are usually transferred to your lenders SVR so this can be a good time to review your options.

Tracker variable rate mortgages are linked to a rate such as the Bank of England base rate and move in line with their changes. So, if the Bank of England puts the base rate up by 0.25%, your mortgage rate will rise by the same amount.

The other type of variable rate mortgage is a discount. Discount mortgages are linked to the lender’s SVR, not the Bank of England base rate. SVRs are set by each lender and therefore can change even if there has been no change in the Bank of England rate.

Variable rate mortgages can offer the lowest initial interest rates. However, repayments are not fixed so you will need to make an allowance for the possibility of fluctuating payments when planning your monthly budget.

Some lenders combine different types of mortgages. They might combine a fix and a tracker, or offer some sort of guarantee that a variable rate loan will not rise above a certain rate.

What documentation do I need?

When you find your preferred lender, having your paperwork in order will help the process (this list of documents varies between lenders). Here is a selection of items you will need to provide:

Evidence of your income
Proof of ID such as a passport or driving licence
Proof of address
Bank statements
Your latest credit card statements

Other considerations

The funding for a property purchase is made up of the mortgage from the lender plus the deposit from the buyer. The deposit is the amount of money you are putting in from your own sources, whether that is your savings and investments, equity from the sale of a property or from parental assistance in the form of a cash gift. If you are using your savings and investments you must be able to evidence this through plan statements. If you are fortunate enough to have parental assistance, a letter confirming the monetary gift will be required.

The amount of deposit you put in will determine the amount you require as a mortgage. This is expressed as a percentage called the Loan to Value (LTV) and is the amount of money you are borrowing against the value of the property. The more you have as a deposit, the less you will need to borrow of the property’s value. Typically this is grouped within certain LTV brackets such as 75%, 80%, 85%, 90% and in some instances, 95%. Generally, the lower the LTV the lower the interest rates. However, a low interest rate does not always offer the best deal for you as there may be high fees involved, or you may revert to a higher interest rate during the deal period. You should also be aware that some lenders may ask you to pay a Higher Lending Charge if the LTV is high.
There are also other significant costs that need to be taken into account when buying a property. These include, but are not limited to: solicitor costs, valuation and survey fees, lender product fees and Stamp Duty Land Tax (SDLT). You can check how much stamp duty you would be likely to pay using our stamp duty calculator.

If you are buying a property with a mortgage secured on it there are other monthly costs that will also need to be taken into account, including insurance. Your lender will require buildings insurance to be in place as a condition of the mortgage offer. However, this is something that most buyers will want to arrange together with contents insurance to protect belongings within the property. If you purchase a leasehold property (such as a flat in a block of flats) the freeholder may have already arranged buildings insurance, in which case you may not need your own buildings policy.

If you are going to live in the property you are buying, you will also need to take into account the ongoing costs of running your home, including utility bills and council tax, which may be higher or lower than what you currently pay. You can research council tax for postcodes or areas you are considering in the London area information section of this site.
Once you have arranged your mortgage and you have moved in, you will have entered into a contract with the lender who will expect you to pay it back in monthly instalments. If you have a repayment mortgage this will be a combination of the money borrowed and the interest owed.

While no longer widely available, some lenders may still consider interest only terms if the applicant presents a credible repayment plan. For these mortgages your monthly payment only covers the interest owed. For either type of mortgage, it will be your responsibility to ensure you honour these repayments. If due to unexpected circumstances this is not possible, then you will be at significant risk of losing your property. To avoid this happening, you should have a discussion with our specialist protection adviser about what appropriate insurance would suit you. They will explain the differences between the insurances and identify the best option for you. Your adviser will then tailor a suitable insurance package and this cost should be considered in your overall monthly budget.

Your home may be repossessed if you do not keep up repayments on your mortgage.

We do not charge for advice. We do charge a one-off lifetime fee for the arrangement and processing of your mortgage; our typical fee is £299 and becomes payable only once you have the keys to your property.

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