Choosing the right mortgage
It is important that you choose the right type of mortgage to suit your circumstances. Yet with so many different types of mortgages on the market, the task of choosing the right mortgage for you can be both a daunting and confusing one.
We can provide you with the expert advice to guide you through each type of mortgage and assist you in choosing and arranging the right one that is tailored to your needs.
Explained simply, a mortgage enables you to borrow money from a lender to purchase a property-the amount borrowed plus interest must then be paid back. This is where it gets more complicated because there are so many other factors to consider. For example, there are different ways to repay a mortgage, different interest rates and there are also more specific types of mortgages to cover various situations. You will need to look at what special features may suit you.
The various types of mortgages are:
- Repayment mortgages
- Interest only mortgages
- Fixed rate mortgages
- Tracker mortgages
- Variable rate mortgages
- Discounted rate mortgages
- Capped rate mortgages
- Offset mortgages
- Cashback mortgages
- 95% and 100% First time buyer mortgages
- Flexible mortgages
- Buy to let mortgages
Sometimes these mortgage types can overlap and combine together. Ultimately, the two key types of mortgage are the Repayment and Interest type mortgages.
Otherwise known as a capital repayment mortgages and is a popular choice for many buyers. It involves making a monthly capital and interest payment to repay a proportion of the capital and interest on your mortgage until it is all paid off. This type of mortgage is usually fixed over a set period of time such as 25 years. By the end of this period and as a result of the regular repayments made, you will have repaid the whole amount that was borrowed at the outset.
Sometimes, if you move property within your mortgage term, you may be able to ‘port’ your mortgage. Porting your mortgage will mean you can transfer your mortgage with you. Alternatively, you can pay off the original loan and take a new mortgage out on your new property. However, you may then be subject to early repayment charges.
There are many advantages in that it provides peace of mind with the knowledge that everything has been planned out to ensure that the house will be paid for at the end of the mortgage. It is also a straightforward process which is easy to understand.
Interest Only Mortgages
This type of mortgage involves paying just the interest on a month by month basis and the capital is paid at the end of the mortgage term with money that has been saved up over the years. As part of the lending criteria, the lender will want to see that you have a plan in place that will enable you to pay off this capital at the end of the term.
The advantage with this type of mortgage is that the monthly payments will be lower as you are only paying the interest as you go along. This will benefit those who want to make the lowest repayments and at the same time have a plan to pay off the rest of the loan at the end i.e. they have some kind of investment vehicle such as an ISA or endowment policy that will generate the amount. What should be noted is that the total amount of debt does not reduce over time.
Fixed Rate Mortgages
This is where the mortgage rate is fixed for a specific term of years. There is certainty as to how much you will pay monthly for that fixed period and there will be no change due to fluctuations with the interest rate. However, following this fixed period, the mortgage will revert back to the lender’s standard variable rate.
The plus side to this type of mortgage is that it provides a sense of stability-as you know exactly how much you will pay over a set period of time-this in turn can assist you in your budgeting.
However, there are disadvantages. If for example the base rate is dropping, then your fixed rate may end up being more expensive. Also, if you decide to move away from this mortgage, then you may face early repayment charges.
A tracker mortgage is a mortgage where the rate that is paid will fall in line with The Bank of England base rate. You pay a set interest rate above or below the base rate. Therefore, the rate you pay is dictated to by this. Sometimes, a minimum rate below which the interest rate cannot drop lower will already be set by your lender. But no limits are placed the other way round.
By way of example, if we were to consider the Bank of England Base rate + 1% and then look at the base rate on November 2016- which was 0.25%, you would obtain a mortgage rate of 1.25%.
Standard Variable Rate Mortgages
Every lender has a Standard Variable Rate (SVR), which is the mortgage interest rate which fluctuates. This kind of mortgage sets the interest rate according to the lender’s SVR. Interest payments may rise or fall if there is a change in The Bank of England’s base rate. This can be to your disadvantage if the base rate falls and can also cause unpredictability.
Often, a buyer will fall into this standard variable rate mortgage once their initial mortgage deal has expired and this in turn will usually result in higher payments. As such, this is the ideal time to consider what is on the market in order to obtain a better deal.
Discount Rate Mortgages
This offers a reduction to the lenders Standard Variable Rate (SVR). These are fixed and can be some of the cheapest mortgages on the market but it must be noted that as they are linked to the SVR then rates can go up and down. After this discounted period of time has finished, the mortgage will revert back to the SVR mortgage. A useful point to keep in mind is that the greater the discount, the shorter the period of time it applies to.
Capped rate mortgage
This places a cap on how high the interest rate can reach. This will provide you with the confidence of knowing that the interest rate will never exceed the cap. The advantage of this is that you will know that your monthly payments will not exceed a certain level and this will make it easier for you to budget. However, it is important to note that as a result of the capped interest rate, rates can often be higher than fixed rates.
This is where a mortgage and savings account are linked and you are able to offset the balance of a mortgage against funds in a savings account held with the same lender. What about the interest? Well, you would only pay interest (calculated on a daily basis) on the net balance between the accounts.
Example: A mortgage is £200,000 and savings are £15,000.
The interest will be calculated on the mortgage amount after the savings amount has been deducted from the mortgage amount. So in this example, the interest will be calculated on £185,000.
You can use this kind of mortgage within both repayment and interest type mortgages. Whilst this may cut the amount of interest you are likely to pay, the mortgage rate is likely to be higher.
This type of mortgage is advantageous to those who have a high amount of savings or are higher rate tax payers.
With this mortgage, you typically take out a mortgage and are awarded a % of the loan back. This is good in the sense that it can release some cash back to you when you most need it. For example, you may need it to pay off a credit card/pay for home furnishings and the list can go on depending on your own particular circumstances.
The disadvantage of this kind of mortgage is that the interest rate can be high and there is a lack of flexibility.
95% and 100% Mortgages
These mortgages are good for those first time buyers who are trying to get on the property ladder but lack the funds. In the case of 95% mortgages, some of these buyers typically can only afford to put a 5% deposit up front. The mortgage is then taken out on the remaining 95%. It is important to bear in mind that usually the mortgage rate for these type of mortgages is often higher as it is deemed a higher risk for lenders. On the plus side, it is a good type of mortgage for those who are struggling to pay for a higher deposit.
A 100% mortgage is less common, but what it does is it allows a buyer to borrow the entire purchase price of the property and pay no deposit. Clearly, this would incur higher interest rate charges and there are risks involved. Typically, these type of mortgages will require a guarantor such as a family member to provide some kind of security.
These mortgages give you a discretion to vary your monthly payments. You will need to check with your particular mortgage conditions to understand what flexibility arrangements are in place. Some mortgages may allow you to make an overpayment or underpayment each month. It is usual for the mortgage to stipulate that you can either follow or over pay on a repayment schedule. Many types of other mortgages include such flexibility arrangements and will allow overpayments.
Buy to Let Mortgages
These type of mortgages are designed for those who wish to buy a property to rent out. It is unlikely to apply to first time buyers and there will be strict criteria on obtaining such a mortgage as the lender will want to link the amount borrowed partially on the amount of rent you expect to receive.
As you can see, there are so many things to think about when you are looking at mortgages and obtaining the right mortgage is important as it can save you much money in the end. It can also give you the confidence and security needed when re-paying your mortgage. Each person has their own specific set of circumstances –there is no such thing as one mortgage type fits all.
With our experience, knowledge and guidance as well as contacts and wide reach of the market, we will be able to answer all of your questions effectively, find the best mortgage deal for you and provide you with the advice and guidance you need to take you through the process from start to finish.