Choosing a mortgage

This content applies to England only.

Housing laws vary between England and Scotland. This page applies to England only. Get advice relating to Scotland

When shopping around for a mortgage, it's important to get good advice. Financial advisers often give this free but check how independent they are and make sure they're authorised by the financial services authority. Think about your financial situation in advance and ask the adviser some key questions.

Shop around

There are many different lenders and types of mortgage. It's worth shopping around, checking what's on offer from:

• lenders such as banks or building societies
• mortgage intermediaries or brokers (such as a financial adviser or an estate agent) who arrange deals with lenders
• the builder or property developer, if it's a brand new house

It's best to contact several different sources and make comparisons. The internet can be a good place to compare mortgages - many lender and intermediary websites have calculators to help you work out how much a mortgage would cost. But you won't be able to ask questions and check details as easily as you could face-to-face or over the phone.

Get good advice

You can get advice from an intermediary or broker (such as an estate agent or financial adviser) or direct from a lender, such as a bank or building society. Make sure any mortgage adviser understands your medium and long-term plans. Sometimes people end up with a mortgage that isn't as cheap or as flexible as they could have got. Read the small print on any mortgage literature or advertisement - sometimes what looks like a good deal may have a catch. It's a good idea to have some direct questions ready (see below).

Many companies now sell mortgages direct, over the telephone or the internet. This may seem time-saving but you may not get much advice about whether what is offered is suitable for your needs.

Check who's advising you

Not all mortgage advice is impartial. Some advisers are tied to just one company's products or work on commission, so they don't always give full or independent advice. An adviser should disclose any commission they would get from arranging a mortgage for you.

You're more likely to get impartial advice if you pay a fee to a broker or independent financial adviser (IFA) than if you go to one who works on commission. If you pay a fee it will typically be about 0.5% of the amount you borrow, though it might be up to 1% in complex or urgent cases. But so long as your needs are straightforward and you're prepared to contact two or three 'free' advisers and compare the deals they offer, you'll generally end up with all you need to know without paying a fee.

Check whether the lender is authorised

The Financial Services Authority (FSA) regulates most (but not all) financial service providers in England and ensures that they comply with certain standards. You can find out whether the lender you are thinking of using is authorised on the FSA website.

Ask your mortgage adviser for information

Make sure the person you speak to:

• understands your medium and long term needs (for example, do you expect to move again quite soon?)
• spells out the pros and cons of the different repayment options
• explains any redemption penalties you'll have to pay if you switch to a better deal early on in your mortgage or pay off your loan early
• spells out any commitments (such as expensive insurance) linked to what looks like a good deal
• explains what would happen if you get into mortgage arrears
• gives you a written statement of all the upfront payments involved

Work out how much you want to borrow

Many lenders won't lend more than 90 or 95% of the purchase price. If you need to borrow 90% or more, you may have to take out mortgage indemnity guarantee insurance (which could cost several hundred pounds).

When working out how much you can afford to pay as a deposit, don't overlook the other upfront costs of buying such as:

• solicitor's fees. You can save money if your solicitor who is doing the legal work in buying the property can act for both you and the lender in processing the mortgage
• the lender's valuation and/or a full structural survey
• an arrangement fee to the mortgage broker or lender, typically £200 to £300
• building insurance from the time you exchange contracts
• stamp duty on properties over £60,000
• moving costs

Only take risks you are happy with

Some mortgage deals are slightly more risky than others and you could end up still owing money at the end of your mortgage term. Interest-only loans depend on an investment plan such as an endowment policy or Individual Savings Account (ISA) to pay off the capital sum you borrowed and the income from this may not be guaranteed. Some people who took out endowment mortgage plans in the past are now finding that they have a shortfall and will have to make extra top-up payments to cover the loan. A repayment mortgage carries the least risk because provided you keep up the repayments your mortgage will always be paid off by the end of the term.

Check how interest is calculated

Interest rates will have a big impact on how much you pay overall.

A lender's basic mortgage will usually be at what's called the standard variable rate of interest (or SVR), which goes up and down as bank interest rates change. It is not always easy to compare rates of different lenders, but the annual percentage rate (APR) must always be shown in advertisements or leaflets and makes comparing mortgage deals easier: it includes any fees or other costs charged by the lender.

Many lenders offer cheaper rates or special deals for the early years of your mortgage. The deal you choose will affect if and when the interest rate on your loan can go up or down.

Look for a lender that calculates the interest daily or monthly rather than annually. Over a 25-year mortgage term, this could save you several thousand pounds. It also makes it easier to vary your monthly payments.

Check for penalties

You may have to pay a redemption penalty if you switch to a better deal or a different lender in the first few years of your mortgage or pay off your loan early. Cheap-rate mortgages which look good value often have penalty clauses like this, which could mean paying back all the savings you received from a special deal. Check how long you would be locked into a deal before you could switch without paying a penalty. You may want to avoid deals with extended redemption penalties, which lock you into the lender's standard variable rate even after the initial cheap rate deal has expired.

If you think you'll want to switch lenders or pay off additional lump sums early on, it may be best to avoid special deals and go for a mortgage at the standard variable rate.

Check whether the mortgage meets CAT standards

Many mortgages are described as CAT standard (CAT is short for Charges, Access and Terms). Non-CAT mortgages are not necessarily worse but the Government CAT standard should mean a reasonable-value mortgage with no hidden charges or terms.