Choosing a mortgage

After finding that elusive first job, the next step is to buy a car and a house. Here are a few pointers for buying a house:

Most probably none of us have the money to buy a house outright. Therefore, we will naturally apply for a mortgage to fund our purchase. There are approximately 10,000 mortgages on offer in the market and choosing one can be extremely difficult. Websites like can help you make a choice.

Comparing different mortgages is not easy as there are so many different variables involved and each mortgage provider projects their products to make them look attractive regardless of the "true cost of borrowing".

First step is to decide whether you want a Repayment, or Interest-only mortgage. Before I explain what they mean, your monthly repayments remain roughly the same for either type of mortgage - the difference lies in long-term benefits and portability.

As the names suggest, your monthly payments for a Repayment mortgage will include interest as well as the capital (amount borrowed). Although this sounds like an attractive proposition, the catch is that during initial years your monthly payments are comprised mainly of interest and a little proportion of the capital is taken off. During the final years of your mortgage (usually year 15 or later) you will be paying off more of the capital every month.

Interest-only mortgage means that you pay your mortgage provider interest on the capital and make separate arrangements to repay the capital after, typically, 25 years. The most popular way of funding the repayment is an Endowment Policy (which I'll try to explain later).

Personally I prefer an Interest-only mortgage mainly because one is in control:

Take out a mortgage now for say, 5 years on a special rate or a discount. After 5 years, move your mortgage to another provider who's offering a better deal. If you do the same with a Repayment mortgage you start from scratch in that your monthly payments will mainly comprise of interest and not repayment of the capital.

What to look out for?
Mortgage providers would like you to stay with them for as long as possible. Although the trend is changing, there are still some products where you enjoy a discount for a short period of time while you are tied up with their "Standard Variable Rate" (SVR) for much longer. Every mortgage provider can set their SVR to whatever they want to.

An excellent example (almost impossible to find):
Building Society A offers you a fixed rate of 5.5 percent for five years.
You are free to move your mortgage whenever you want, even during these five years and there are no penalties to pay.
However, once the period of this special deal is over you revert to their SVR.

A good example (can be found easily):
Building Society B offers you a fixed rate of 5.5 percent for five years.
If you move your mortgage during these five years you will be charged a penalty equal to six months' payments.
However, once the period of this special deal is over you are free to move or revert to their SVR.

A bad example (beware - some of these are still about):
Building Society C offers you a fixed rate of 5.5 percent for five years.
If you move your mortgage during the first seven years you will be charged a penalty equal to six months' payments.
During year 6 and 7 you will pay them according to their SVR which can be anything from 6-9 percent.
After the seventh year of your mortgage you are free to move.

Independent Financial Advisor???
Just like there is never a free lunch, I believe that there is no thing like an "Independent" financial advisor. Mortgage providers pay decent commissions to agents selling their products so no matter how hard one tries, it is difficult for an advisor to ignore them. You are welcome to visit a few who don't charge for initial consultations but my advise would be to do your home work yourself and make an informed decision.

For the best deal, you can make note of different mortgages and compare for each of them:

  • Rate for the duration of the deal
  • How long are you tied up for? In other words will you be penalty-free once the discount is over?
  • Initial fees: Valuation, Arrangement and all sorts of other charges
  • Option to repay the capital anytime without penalties.

I have attempted to create a simple calculator which might help you compare up to three different mortgage products. Just make sure not to enter anything in the greyed out boxes in the spreadsheet. These are used to make automatic calculations.

To save the spreadsheet, Right click here and choose "Save Target As..." (or something similar depending on your browser) and save it on your PC.

I hope you find it useful.

Endowment Policy:
The principle is that you pay the bank or building society a monthly amount. This contribution will grow over 25 years (typical duration of a mortgage) and will be enough to cover the capital you borrowed for you Interest-only mortgage. It also includes life cover which means that in the event of the mortgage-holder's death, they will pay off the capital.

The bank assumes that your money will grow at, say 6 percent per year. However, if it grows at 5 percent, you will have to pay the difference at the end. Or if it grows at 7 percent, you can keep the rest after repaying the capital.

This point wasn't explained well enough to people who took out mortgages in late 1970's and 80's when interest rates were quite high. When their policies matured in the 1990's their contributions didn't grow as projected initially (probably at around 15 percent) and they had to fund the rest themselves. This created a huge scandal in the 1990's but what people forget is that despite being mis-sold, these people had contributed far less than they would have done for an equivalent policy taken out today. Well that's a different story altogether.

I know this is very confusing. I have gathered all this information from hands-on experience of buying and selling houses during the last 6 years so don't expect to grasp everything in one sitting.

Please email me if you have other questions or need any kind of clarifications.