Mortgage options

Before buying a property, you should familiarise yourself with the different mortgage options and mortgage terminology. Understanding the available choices will enable you to choose a mortgage that best suits your needs, as getting this wrong can be a costly mistake.

The most common mortgage options

The most common mortgage options that you will encounter are fixed interest rate, tracker, and variable interest rate mortgages.

Fixed rate mortgages fix the interest rate and repayments for a specified period, usually around 3 to 5 years, thereafter the interest rate and payments generally increase.

A tracker rate mortgage will have an interest rate that is a specified percentage plus the base rate of interest and may have a fixed period. After the fixed period has elapsed the mortgage will become a variable rate mortgage.

A variable rate mortgage will normally be a specified interest rate above a certain benchmark set by the bank (often the base rate of interest set by the Bank of England). As the interest rate is variable it can go up or down, resulting in fluctuating payments, increasing, or decreasing in line with interest rate changes.

Mortgage terminology

Mortgage deposit

The mortgage deposit is the amount saved to use as a part payment when buying a home with a mortgage. Most mortgage lenders will require a minimum deposit of around 5% to 20% of the property value. Typically, a larger deposit can lead to more favourable interest rates and mortgage terms.

LTV or loan to value

Loan to value is the percentage of the loan to the value of the property. If you are purchasing a house for £200,000 and have a deposit of £20,000, you have a 10% deposit and an LTV of 90%.

Redemption penalty or early repayment charge

Redemption or early repayment penalties are fees borrowers may have to pay if they repay or redeem their mortgage within a specified period. The fees can vary, being a fixed amount, a percentage of the mortgage balance at repayment, or several months of interest. The fees can vary depending on how long you have had the mortgage. Ensure you check out early redemption fees in the terms and conditions of the mortgage.

Offset mortgage

With an offset mortgage, your mortgage is linked to a savings or current account. The balance of the linked account is offset or deducted from the mortgage balance before interest is calculated. This reduces the amount of interest that you pay on your mortgage. However, you won’t receive any interest on the balance in the linked account.

Re-mortgage

Re-mortgaging is when you switch your existing mortgage to a new mortgage lender or take out a new mortgage with your current provider.

Porting

Some mortgage lenders will allow you to transfer your existing mortgage to a new property whilst keeping your current interest rate and existing mortgage terms.

Base rate

This is the base rate of interest as set by the Bank of England. This is the rate of interest that the Bank of England will lend to other financial institutions.

Stamp duty land tax

Stamp duty is the tax or levy that you pay to HMRC when purchasing a home.

Equity

This is how much of your home you own. Equity equals the house sale value less the remaining mortgage. A house valued at £200,000 with a mortgage of £150,000, has equity of £50,000 in the property.

Negative equity

This is when the property value is less than the outstanding mortgage on the property. This may occur after a house price crash or a decrease in property values.

Other cost considerations when buying a home

Conveyancing and searches

Conveyancing costs are the fees charged by a solicitor or conveyancer, who is acting on your behalf for the purchase of the property. This includes doing searches, preparing the legal paperwork, and transferring the deeds of ownership. The mortgage lender will require a survey of the property. The survey checks that the property is suitable for lending against, is worth what you are paying for it, and does not have any serious structural or other issues. There are various surveys available depending on the age and condition of the property. They vary in cost becoming more expensive the more detailed the survey is.

Mortgage arrangement fees

These are fees that a mortgage provider may charge when taking out a mortgage with them. Mortgage setup fees can vary and are usually around £500 to £1,000. If you use a mortgage broker or financial advisor, they may charge you a fee in addition to the bank’s mortgage setup fee.

Stamp duty and first-time buyers

Stamp duty is the tax payable to HMRC (the government) when purchasing a property. First-time buyers purchasing their very first home can purchase a property up to £425,000 and be exempt from stamp duty. First-time buyers purchasing a property costing more than £425,000 will pay stamp duty only on the amount over £425,000. As a first-time buyer of a property costing £500,000, you’ll pay stamp duty of £3,750 (5% of £75,000). This exemption is, however, only available on properties up to a value of £625,000. There are various stamp duty calculators available online. Some property websites provide calculators, that calculate the stamp duty payable on a particular property – a useful resource. The stamp duty bands and rates are detailed below with examples.

Stamp duty for those already on the property ladder

If this is not your first property purchase, stamp duty will be payable at the rates detailed below. Buying a second property, in addition to your existing home, incurs an additional 3% on the rates below.

Removal Costs

Friday is the most popular day for completing house purchases and moving in. As a result, moving on a Friday can be more expensive than on other weekdays. Do get several removal quotes as they can vary significantly in price. There’s always the option of asking friends and family to help and compensate them with free food and drink.

Stamp duty bands and rates

Property value	Main home	2nd property
Up to £250,000	0%	3%
The next £675,000 (£250,001 to £925,000)	5%	8%
The next £575,000 (£925,001 to £1.5 million)	10%	13%
The remaining amount (above £1.5 million)	12%	15%