This is the ultimate guide to comparing mortgages in 2020
by Joseph Zammit
If you’re thinking about buying a new home or remortgaging an existing one, you need to know how to compare mortgages.
That’s a lot of money to waste 💸
So why waste it?
You’re probably thinking you can just use a mortgage comparison tool…
Mortgage comparison tools are not the golden ticket.
- They will tell you what rates lenders are offering based on some very high level detail.
- They will not tell you whether you are eligible for that rate.
It gets worse:
That really low rate...
The one you think is the best on the market...
...its not always the cheapest.
We’ll explain everything to you.
A step-by-step guide to comparing mortgages and finding the best mortgage for you
In this comprehensive guide I’ll cover:
- Most important thing to look for when comparing mortgages
- How to use mortgage comparison tools
- How to set yourself up for success
- Understanding different mortgage types
Want to know the best way to compare mortgages, keep on reading…
Most Important Thing to Look for When Comparing Mortgages
Hint: It's not the interest rate
Understanding Different Mortgage Types
There are two main types of mortgages:
1. Fixed Rate: The interest you pay stays the same for the fixed period, usually between two and five years;
2. Variable Rate: The interest you pay can change.
Fixed Rate Mortgage
The interest rate you pay will stay the same throughout the length of the deal.
If you see someone advertising a “two-year fix” that means the rate advertised is fixed for two years.
Fixed periods tend to be two, three or five years, but can go as high as ten years.
Taking out a fixed rate mortgage is like betting on interest rates not going down over the fixed period.
In periods of very low interest rates this tends to work in your favour. It also guarantees some peace of mind as the amount you pay each month will stay the same.
Fixed Rate Mortgage Pros and Cons
- Peace of mind – monthly payments will stay the same, you know what to budget each month
- The interest rate on a fixed rate deal is usually a bit higher than a variable rate mortgage
- If interest rates fall you won’t benefit
What to watch out for:
- Early repayment charges – if you want to remortgage before the end of the fixed period, you’ll have to pay a penalty
- The end of the fixed period – start looking to remortgage at least three months before your fixed rate expires.
At the end of the fixed period your lender will move you onto their standard variable rate. This is higher than what you’ll already be paying. The difference can be hundreds of pounds per month, so be ready to switch when your fixed rate expires.
Variable Rate Mortgages
With a variable rate mortgage the interest rate can change at any time.
You'll need to factor this into your monthly budget. Make sure you can afford to make higher payments if interest rates rise.
Variable rate mortgages come in many different forms:
Standard Variable Rate (SVR)
This is the normal interest rate your mortgage lender charges.
Its a variable interest rate which they use as a benchmark for their other products.
The lender charges interest at a rate above the Bank of England Base Rate.
If the BoE Rate is 1.0%
and the SVR is BoE + 0.8%
then the SVR will be 1.8%.
Your payments can go up or down according to changes in interest rates.
And it doesn’t track above the Bank of England Base Rate at a set percentage. The rate you pay will be set by your mortgage lender.
So, if the Bank of England Base Rate goes up by 1%, your lender could choose to:
- Keep your rate the same; Or
- Increase your rate
In theory, they could even decrease your rate – whilst this would be nice, we’ll keep dreaming as it’s almost never going to happen.
Except maybe ⏰🐷✈
Why choose a Standard Variable Rate?
In the words of Braveheart:
With an SVR you’re free to leave your lender at any time and to make overpayments on your mortgage.
Uncertainty – your rate could change at any time and you’ll need to factor this into your affordability calculations.
If the interest rate goes up by 1% next month can you continue to make payments on your mortgage?
If you decide on a variable rate, you need to build a buffer into your monthly payments. Make sure you can afford to make your mortgage payments in the event of a rate rise.
Other Mortgage Types
This is a discount on the lenders standard variable rate.
The discount only applies for a certain period of time, usually two or three years.
Big discount does not equal good rate
Don’t assume that the bigger the discount, the better the rate.
Different lenders have different SVRs, so if a lender is offering a 2% discount on a 6% SVR that doesn’t make it a good deal!
Lender A is offering a 2% discount on a 6% SVR – you pay 4%
Lender B is offering a 1.4% discount on a 5% SVR – you pay 3.6%
B is the BETTER DEAL
Lender A is offering a bigger discount, but Lender B is the cheaper option.
… what about Lender C?
Lender C is offering a two-year fixed at 1.8%.
That’s 50% cheaper than lender B.
But you say:
You didn’t know about lender C. 😵
That’s why it pays to shop around. 🧐
Always shop around.
This is where a mortgage broker can help.
They’ll be able to search thousands of rates from 80-100 different lenders.
The best part:
It costs you nothing, because there are free mortgage brokers, including us 😊
Pros and Cons of Discount Mortgages
Much the same as the pros and cons of a SVR, but:
WATCH OUT FOR EARLY REPAYMENT PENALTIES.
If you want to leave before the end of the discount period, you may have extra charges to pay.
Tracker mortgages move in line with another interest rate. In most cases, the Bank of England’s base rate plus a few percent.
Tracker Rate = BOE Base Rate + 3%
BOE Base Rate = 0.8%
So Tracker Rate = 0.8% + 3% = 3.8%
If Bank of England Base Rate rise by 0.3% to 1.1% then in our example above, our new rate is 4.1%.
Trackers are usually offered over a certain period, two to five years. Some lenders will offer trackers which last for the life of your mortgage or until you switch.
- If the rate its tracking falls, so too does your mortgage payment
- An increase in the rate you’re tracking will cause your mortgage payments to rise
- You might have to pay an early repayment charge if you want to leave before the deal ends
What to watch out for:
Watch out for the small print. You want to make sure that your lender can’t increase your rates even when the tracker rate hasn’t changed.
Capped Rate Mortgages
Your interest rate moves along with the lenders standard variable rate. But it’s capped at a certain percentage rate.
- Security – your rate will not rise above the cap.
- Cost – a fall in the SVR will reduce your payments
If you can afford to pay the mortgage at the level of the cap, then you have the certainty of knowing you can always afford your mortgage payments.
- Caps tend to be quite high
- The rate is generally higher than other variable rates and fixed rates
- Your lender can change the rate at any time up to the level of the cap
An offset mortgage is where you have savings and a mortgage with the same lender.
Your cash savings offset the amount of mortgage interest you're charged.
This means you won't pay interest on part of your mortgage. You still repay your mortgage every month.
Taking it all in
We’ve covered a heck of a lot of different mortgage types. If it feels like a lot to take in, don’t worry about it.
The two types you’ll come across most often are the Fixed Rate and the Standard Variable Rate.
If you’re using a good mortgage broker they’ll review all mortgage types and advise you on the best type given your circumstances.
How To Compare Mortgages
When it comes to searching for a mortgage, a lot of people rely entirely on mortgage comparison tools. These tools provide a good indication of current mortgage rates. They won't tell you which mortgage is best for you.
Where most people go wrong is thinking that the lowest interest rate is the best. Often, this isn’t the case.
Most mortgage comparison tools rank mortgages based on interest rate or monthly payments. This doesn’t account for any other fees or incentives associated with the product.
Before looking at the results, we need to cover what goes into these tools.
Understanding the inputs
Before you begin to compare mortgage rates you need to make a few decisions upfront. Mortgage comparison tools can only compare mortgage products like-for-like. This means that the type of mortgage you choose will determine the rates you see.
By default, most tools will show you mortgage types with lower rates. This doesn't mean that that particular mortgage type is best for you.
You want the best deal possible, but here are some things to consider:
During the initial period of your mortgage, you get a lower than standard interest rate. Think of it as an introductory offer from your lender.
Lenders use these offers to pull you in and rely on you being too lazy to leave.
After the initial period they hike rates and make more money from you.
Initial periods can be anywhere from two to ten years. Having an introductory offer for ten years may sound attractive, but the best deals are usually on offer for the shortest initial period.
After the initial period you can remortgage without penalty and find a more attractive rate.
So why would you want a longer initial period?
The answer to that is peace of mind. You don’t know what offers will be available to you in two years. Today’s rates for a five year initial period could be better than anything you’ll find one year from now.
On the flip side to that, locking yourself into a longer initial period means you forego the flexibility to switch rates sooner. If interest rates go down and you want to remortgage during the initial period, you’ll have to pay a penalty.
There’s no right answer to this, so it’s important to assess your personal circumstances and weigh up the pros and cons to you. This is where discussing products in detail with a mortgage adviser can really help.
Capital + interest: you pay off part of your mortgage each month, and interest on top. By the end of your mortgage term, your loan will be paid off in full.
Interest only: you only pay interest on your mortgage each month, but none of the mortgage debt itself. At the end of your term, you’ll have to pay it off in full.
There’s been a big trend in people opting for interest only mortgages. Because the monthly payments are lower, interest only looks more attractive. But, your ownership of the property isn’t increasing from month to month. At the end of the mortgage term you’ll have the same equity as when you first bought the property. This means that you’ll need to pay off the mortgage in full or remortgage.
The danger with interest only mortgages is that they rely on the value of the property increasing over time. I’ve heard so many people say “property prices only go up”.
Don’t kid yourself. Protect the downside.
The last thing you want to find is that you don’t own any of your property. If for example you put down a £20,000 deposit on a £200,000 home, meaning you borrow £180,000.
And two years later that property is now worth £170,000. You still owe the bank £180,000, so if you sold that property you would have to find £10,000 extra to pay off the debt to the bank. This is called negative equity.
At the end of the day it’s up to you if you want to take a bet on your house price rising. If you do, make it a calculated bet. Don’t screw over future you, for the sake of paying a bit less today.
If you’re planning on taking an interest only mortgage, consider how you’ll pay for the property at the end of the term and in the worst case.
Fixed rate: your interest rate (and so what you pay each month) won’t change over a fixed period of time.
Variable rate: your interest rate could go up or down, so what you pay each month could change. During the initial period, you get a discount on your variable rate.
This is where I see a lot of first-time buyers make mistakes.
When you’re using a mortgage comparison tool you may compare monthly payments and interest rates for fixed versus variable.
Most of the time, the cheapest variable rate will be cheaper than the lowest fixed rate.
First-time buyers make the classic mistake of thinking that the lowest rate is best.
The variable rate being cheaper today, does not mean that it will be cheaper tomorrow.
Yes, rates can go up or down.
But do not let the fear of missing out push you towards a variable rate.
Consider where rates are today versus historically. Right now, we’re benefiting from low interest rates. I’m not saying rates won’t go lower. But by fixing your rate you’re guaranteeing that what you pay each month will stay the same for the fixed rate period.
Knowing exactly what you have to pay each month is so important for budgeting.
Fixing your interest rate today, guarantees peace of mind tomorrow.
Most Important thing to look for when comparing mortgages
The number one thing to look at when you’re comparing mortgages is:
the Total Cost.
You want to compare mortgages based on the total cost to you over the initial period.
The total cost includes all fees and incentives (like cashback from lenders). Most lenders offer deals at the start of your mortgage to make it more attractive to you. When the initial period is over, these deals expire. So, the initial period is how long your mortgage deal will run for before switching to a standard rate.
Total cost is useful for comparing different mortgages. That’s because interest rates alone can’t tell you which mortgage is cheapest. A mortgage might have lower monthly payments, but end up being more expensive because of fees.
Some "low-interst" mortgages come loaded with upfront fees of up to £2,500.
You MUST not compare mortgages on interest rate alone!
Don't be fooled by an attractive rate...
The Lowest Interest Rate Isn't Always The Best Deal.
Don't go blindly following mortgage comparison tools.
If you're unsure of anything you can always chat to one of our brokers for free.
They'd be glad to tell you which rate is the cheapest based on the all-in-cost.
How to use a Mortgage Comparison tool
Anatomy of a comparison tool
First things first. You need to get your inputs right.
If you don't know which product is right for you, you're not sure about fixed versus variable rate mortgages, or what the term should be...
Stop what you're doing.
Because garbage in = garbage out.
Don't look at that rate for 1.6% and become deluded, because it may not be right for you.
If you're not sure, speak to a broker first.
Or check out this guide to mortgages we wrote for first-time buyers.
Once you're clear on what type of mortgage you're going for it's time to look at the results.
If my message has gotten through to you by now, you should already know that the lowest interest rate isn't always the best!
Check this out:
Make sure you're filtering by TRUE COST.
The True Cost includes any upfront or other fees that may be included with the product.
Some times paying an upfront fee may not seem pallatable to you, but it could reduce the cost of the mortgage over the period.
Other times you'll be able to roll the upfront fee into the mortgage... So you thought you'd have to pay an upfront fee but instead it's added to the loan and this option turns out to be cheaper than your alternatives.
You never know. So always compare by True Cost!
Finding the Best Mortgage for You
If what we’ve discussed so far seems confusing to you, don’t worry.
Mortgage Comparison tools are great for giving you rough rates. They don’t take account of your personal financial circumstances or your credit history.
Research by The Sunday Times shows that less than four out of 100 people are eligible for deals found on comparison sites.
This is why its so worthwhile to speak with a mortgage broker.
Mortgage comparison tools ask you for the property value, size of deposit and term. You then see a list of available deals that fit these criteria.
What they don’t tell you is that the loans depend on lenders’ affordability tests.
Affordability tests scrutinise expenses such as gym membership, school fees and credit cards.
A mortgage broker will take to the time to know you better. After which, they can tell you exactly what you can borrow and what it will cost.
Traditionally, you would have had to pay £500 or more for their services. Today there are lots of great FREE online mortgage brokers, including us.
We won’t charge you anything for advising you or for managing your mortgage application.
Like all brokers we receive a fee from the lender.
Best of all:
If you can get a better rate by going direct to the lender, we’ll tell you to do so.
It helps to have someone who can explain everything in simple terms.
Plus, we handle everything, so you have one less thing to worry about 😊
We are FREE, we speak your language, and we’ve got your back.
Enough about us!
Time to share some of today's best mortgage rates with you.
Today’s Best Mortgage Rates
Now that you’re an expert, you're ready to compare mortgages using our mortgage comparison tool.
Of course, you know better than to take these rates at face value, but they’ll give you a good indication of market rates.
Once you've had a look, it's best you chat to one of our advisors so they can tell you what you're eligible for.
Now I'd like to hear from you
What's your favourite mortgage comparison tool?
Do you prefer to use a mortgage broker or go it alone?
Let me know in the comments below.