Choosing a mortgage - how to decide?

hessodreamy

My girlfriend and I are buying a house (first time buyers). I understand what the different types of mortgage are, but am having trouble working out which one would be the best for us, and indeed what factors contribute 'best'.

The mortgage amount is only about twice our combined incomes, so on a 30 year mortgage the monthly payments would be pretty comfortable, whatever the product.

I think a lot of people go for fixed rates because they want security of not being stung by rising interest rates. But does security come at a price? As we can comfortably manage payments, we've already got a decent buffer in case rates rise, so security isn't the biggest consideration (though obviously we don't want to pay more than we need to).

But of course we don't know when rates will rise or by how much. At a guess I think we've probably got a year or two before they change, and they'll rise slowly. In 5 years time who knows?

So what should I base my decision on? Calculating over a certain period (eg 2 or 5 years), and factoring in a range of estimates of interest rates, how much has been paid, and how much equity remains? I haven't done this exercise but I reckon the unknown factors make it a largely one.

Any pointers?

HappyMJ

It's subjective...different for everyone. It's also a gamble. I personally like variable rates. I would not want the shock of going from a low fixed rate then onto a high SVR at the end of the term...even though I would have saved a lot of money by taking a fixed rate. Interest rates will rise but on a SVR or tracker mortgage they rise slowly.

However, if you have stretched it to your budgetary limit then a fixed rate is most likely the best option for you and if interest rates rise you might need to extend the term of the mortgage at the end of the 5 years so you can afford the new mortgage payments.

Oh...and with interest rates so low I'd be overpaying as much as possible so get a mortgage with the option to overpay. Then when rates rise you should be OK paying the higher mortgage payment and still repay the mortgage in time.

pledgeX

I went through the same thing about 2 years ago. We ended up going for a 5 year fixed rate for the security. Looking at the offers available now we could be ~£100 better off each month if we'd gone on a tracker, but tbh it doesn't bother me. It's nice to have the fixed number in your head and not have to worry about it, especially if it's your first time living alone as there'll be all sorts of bills and unknown expenditure that you might not have thought when you originally looked at your finances.

Next time we will almost certainly get a tracker as we'll have a much better idea of our outgoings and will be earning a fair bit more so should be able to cover any interest rate rises.

One last thing, the last time I looked (admittedly only on Nationwide), the difference between fixed rate and tracker mortgages was very small, so even if the interest rate doesn't increase for the entire period of the deal you wont be THAT much better off with a tracker over fixed.

As HappyMJ has said, whatever you go for, make sure it lets you to make overpayments. Once you start looking at this calculator you'll see why!

amnblog

hessodreamy wrote: »

But does security come at a price?

Not in the current market as fixed rates as as low as they have ever been.

I don't like 5 year fixes for first time buyers. a lot can change in five years and you dont want to be paying and early repayment fee to ditch the mortgage or the lender.

Yorkie1

I'm interested as to why you think a 30 year mortgage would be advisable, given that you're only looking to borrow x2 income.

The longer the mortgage, the more interest you'll pay over the term.

25 years is the standard length, with 30 years often used more for those borrowers who are stretching themselves on affordability on the monthly repayments.

resilie

Just pay off your mortgage quicly and don't worry about the long term interedt rates too much. If it's only 2x income you should have it payed off in 6 or 7 years anyway. Dont spend huge amount on interest payments you don't need

NewbuyerNE

I'm observing these threads to learn (currently saving for deposit which we'll have in March).

I want to know as much as possible about mortgages before we apply & just wanted to say thank you for this info, especially the link for the early repayments.

My partner wants to do a 35 year mortgage but I think I have enough ammo now to persuade him to take 25 years & pay and extra £50 each each month. We'd be paid off at 44 and would have saved £45000 more than doing it over 35 years! :j