The world of mortgages can be a difficult one to navigate. How do you know that you are choosing the one that best suits you and your circumstances?
A mortgage is not something you can just rush into, you really do need to weigh up your options to ensure that you are getting the best deal – it can save you thousands of pounds.
If you are a first-time buyer it can be particularly overwhelming knowing which mortgage is the one you should be looking at. But, it is important that you do your research before applying for anything to avoid a costly mistake.
The Different Types of Mortgages
You have found the house of your dreams and had your offer accepted, so now it is time to sort out that mortgage. There is a lot of jargon to navigate – fixed-rate, interest-only, tracker etc. – but you really should familiarise yourself with it all before you meet with your mortgage advisor so you know which questions to ask. Here is our guide to the different types of mortgage.
With a fixed-rate mortgage, your monthly interest rate stays the same for the entire term of the deal, which means that your payment will be the same each month. Fixed-rate mortgages usually run for terms between 2 and 5 years, after which you will be switched to the lenders SVR (Standard Variable Rate). This means you should look to switch your rate or remortgage before your fixed rate ends, as your monthly payments may increase significantly if you let them go to the SVR.
The major benefit to a fixed-rate mortgage is that your rate will not rise, no matter what is happening with the market. This makes this particular mortgage a good choice for first-time buyers or those on a tighter budget who need the stability of a payment that is the same every month. On the other side, if interest rates go down, you could be paying a higher monthly payment than you would be on a variable-rate deal.
For a tracker mortgage, your interest rate is dependent on the Bank of England base rate. Your payment will be the Bank of England base rate plus a further rate, 2.5% for example, and when the base rate changes, so does your payment. Typically, a tracker mortgage will usually have a deal period once it begins, i.e lasting around two years or longer, after which you will be transferred to your providers SVR if you do not review your options. You may have the option for a ‘lifetime’ tracker mortgage, where your payments are linked to the Bank of England base rate for the entire term of the mortgage.
The major benefit of the tracker mortgage is that your monthly payments will go down if the Bank of England base rate drops (although with Brexit uncertainty, this could be unlikely). Furthermore, your interest rate is not affected by changes in your lenders SVR, just the base rate of the Bank of England. However, with a tracker mortgage, you will never know what your payments are going to be throughout the term, which can be a little troubling if you have sudden financial troubles.
A discount mortgage can be a little more complicated for some other deals, but you can secure some lower payments at the start of your term. You will pay your lenders standard variable rate (which does not change often), with a fixed discount for a certain period of time. For example, if a lenders SVR is 3.5% and your mortgage is discounted by 1.3%, your rate would be 2.2%
It is fairly common for a discount mortgage to be ‘stepped’, which means you pay the discounted rate for part of the deal and then the higher rate for the remainder of the deal. With a discount mortgage, the good news is that your rate will be lower than the vendor’s SVR for the length of your deal, and if the SVR is low then your payments could be very affordable indeed. However, your lender may raise their SVR at any time, which will lead to more expensive payments. Look for a discount mortgage which has an interest rate cap which it cannot go above so you can ensure your payments won’t go over a certain amount each month.
Standard Variable Rate (SVR) Mortgage
Every mortgage vendor has its own SVR, which is not dependent on the Bank of England base rate as they set it themselves. As the lenders set their own SVR, the rate will vary from lender to lender, so you will have to shop around to get the best deal. Furthermore, vendors can change their SVR whenever they like, which means that your payments could go up, particularly if there is word that the Bank of England base rate is set to rise.
With an interest-only mortgage, each month you are just paying the interest and not any of the capital. The payments will be low, but at the end of the mortgage term, you will still owe the overall balance of what you initially borrowed. With the interest-only, you will need to show that you will able to pay off the mortgage once the term is up.
The repayment mortgage is much more common than the interest-only mortgage and is where you pay off some of the interest and some of the loan in each monthly payment. The payments will be higher than with an interest-only mortgage, but the upside is that you are building your investment in your home as the monies owed is reducing over the term.
Things to Consider Before Applying for a Mortgage
Before you apply for a mortgage, try to determine which type is best suited to your situation – our expert mortgage advisors can help you with this. The type of mortgage which will be best for you will depend on whether you want to know what your mortgage payments will be every month if you would struggle if your payments were to go up, and if you suspect that your income is likely to change.
If you want some flexibility in your payments – such as the opportunity to overpay, take payment breaks, or underpay, then ask our advisors about flexible mortgages. Overpaying usually doesn’t require a special mortgage, but often your lender will only let you overpay by a certain amount (say 10%) each year without incurring any penalties. Flexibility in a mortgage usually comes at a price, so you will have to weigh up these extra costs with the benefits.
- You generally have a choice between fixed-rate and variable-rate mortgages. The type which is best for you is dependent on your circumstances.
- Discuss your options with a whole of market mortgage advisor, who can advise you on the best deals for your personal situation.
- Have an idea in your mind of the monthly payment you can afford and use this to help determine the best mortgage for you.
If you want to overpay, underpay, or take payment breaks as your mortgage advisor or lender about any flexible options you can add to your plan