How I Picked My Mortgage
Donna Werbner explains how she chose her mortgage.
It was the hardest financial decision I have ever had to make. Despite writing about mortgages almost every day for some time, buying my first home - and taking out my first mortgage - was a daunting prospect. My key questions were:
- Is it better to get a fixed rate or a variable rate?
- Is using a broker better than dealing with a lender directly?
- Is an interest-only mortgage better than a repayment mortgage?
Luckily, I was buying with my boyfriend, and found that discussing it all with him really helped. We sat down together and talked through the options. My instinct was to go for an offset tracker, which follows the Bank of England Base Rate at a set distance and allows you to offset your savings against your mortgage debt, so you can pay off your mortgage quicker.
I was keen to make the most of my savings and reduce my debt as quickly as possible. I also wanted to benefit from any falls in interest rates.
However, my partner preferred the security and peace of mind that comes with a fixed rate. He liked the idea of set monthly payments which cannot suddenly increase one month. After all, he pointed out, if we went for a tracker and interest rates rose dramatically, we might not be able to meet our mortgage payments.
We did agree, however, that we only wanted to be tied in to a mortgage for two or three years at the most. We also decided that we felt more comfortable taking out a repayment mortgage, rather than an interest-only mortgage.
With all this in mind, we decided to look at the mortgage best buy tables and see what kind of deals were on offer.
Best buy tables
What we discovered probably won't come as a surprise to many of you: it's very hard to compare mortgage deals by glancing at a best buy table. Deals not only differ according to the rate and fees you have to pay, but also tie you in for different time periods and require different-sized deposits. This makes it very hard to compare like with like.
So we decided to create our own table, using the various `best buys' we were eligible for. We put all these deals into a spreadsheet (yes, we really were that geeky). Then we figured out the monthly payments of each deal, using this mortgage calculator. This allowed us to see the true cost of the deal, including the fees.
Here's how we did it:
1. We multiplied the monthly payments by the number of months the deal lasted for. So if it was a two-year fixed rate, we multiplied the monthly payments by 24.
2. We added on the fees.
3. We then divided this sub-total by the number of years the deal lasts for. So if it was a two-year fixed rate, we divided it by two.
4. This gave us the cost per year of each deal, including the fees.
Finally we could compare like with like. We messed about a bit with the figures, using the mortgage calculator, to see what would happen to our payments if interest rates rose or fell. And we saw that even if interest rates went up by 0.25% (as was widely expected at the time), then the trackers would still work around £1,000 cheaper than the fixed rates.
But you know what? In the end, like 89% of first-time buyers, we went for a fixed rate. We decided that £1,000 was a small price to pay for the peace of mind a fixed rate would give - or, to put it another way, I decided that what was most important was that both of us were entirely comfortable with the rate we chose. We were on a tight budget, and a fixed rate was the safest option.
This made me realise that, at the end of the day, choosing a mortgage is not simply about getting the best rate. It's about finding a deal that suits you and your circumstances down to the ground. And if you can't figure this out yourself using The Fool's best buy tables (and a spreadsheet), you can always use our Mortgage Service and speak to a whole of market, fee-free broker who can assess your financial situation and chat through the different options with you.
Since we made our decision, interest rates have risen significantly more than we expected. While this means we are sitting pretty with our low 4.99% fixed rate, it does mean that I - supposedly the mortgage expert of the household - am eating humble pie. In public. But at least the geeky, spreadsheet-loving young man I live with is happy. If not a little bit, justifiably, smug.
Work out how much you can afford to borrow. You can do this using a mortgage calculator. This will help you to figure out what your monthly payments will be. If you are not yet sure what interest rate you will have to pay, put 5.75% (the current Base Rate) as most deals have interest rates set at around this level. This should give you a rough idea of your borrowing costs, but don't forget, there will be fees to pay as well.
Figure out what type of rate you want. Ask yourself: can I afford higher payments if interest rates go up? If you can't, it is probably safer to go for a fixed rate, rather than a variable rate.
Discuss your options with friends and family. It's often helpful to find out what other people think. You could talk to fellow Fools on our Mortgages discussion board. Alternatively, you can get fee-free advice from a professional mortgage broker using The Motley Fool Mortgage Service.