There are many choices to make when looking for a mortgage.
There are literally thousands of different types of mortgages on the market and choosing the right one can be daunting. But before deciding which mortgage to go for, you need to decide what type of mortgage to get – repayment, interest only, fixed, tracker or discounted.
The one that is right for you depends on your circumstances. Choosing the right type of mortgage is incredibly important and getting the wrong one could cost you thousands of pounds. Narrowing down the mortgage type that is best suited to your circumstances and finances will help you to choose the right lender and mortgage product.
Repayment or interest-only mortgage?
Repayment (or Capital and Interest) mortgages are when you repay the interest and the equity of the house each month. In contrast, an interest-only mortgage is when you just pay the interest and then pay-off the equity at the end of the term.
For most people, a repayment mortgage is the most appropriate choice – they guarantee you are paying off your debt and ensure you will have repaid the mortgage at the end of its term.
Interest-only mortgages were popular in the past, because the monthly costs were low and it allowed you to defer paying for the house. However today only a few lenders offer interest only and many have conditions such as minimum incomes of £75,000 or a certain amount of equity in the property.
Should I go for a fixed rate mortgage?
A fixed rate mortgage is when the rate is fixed for a set number of years, after which it reverts to the lender’s standard variable rate. More than 90% of homeowners chose a fixed rate mortgage in 2017, according to the Financial Conduct Authority.
Fixed rate mortgages are a popular option, because you know exactly what your monthly repayments will look like over a set period. You are protected from increases in interest rates by the Bank of England during your fixed rate period.
However – you may pay more for a fixed rate mortgage than you would with a variable rate mortgage and you won’t benefit if interest rates fall – so you could be trapped in a higher rate mortgage. You also limit your ability to re-mortgage, as fixed rate mortgages almost always come with early redemption fees.
If I choose a fixed rate, how long should I fix for?
If you do decide to go for a fixed rate mortgage to guarantee your mortgage costs, you need to decide the term of it – normally two, three or five years.
Going with a five-year fixed mortgage will give you greater certainty, and can be appealing for people in stable but financially stretched circumstances who want to minimise any financial risks. But a lot can happen to your circumstances in five years, and you would have a penalty for changing the mortgage early.
A two or three year fixed rate is often at a lower interest rate so you could save on your monthly payments however, as it would end earlier, it leaves you open to fluctuations in the market and if interest rates are higher when your rate finishes then whatever you change to could end up costing you more.
For these reasons, choosing to fix your mortgage and how long for will depend on your circumstances and also what you think will happen in the future in regards to pay increases, having children or moving home.
What is a tracker mortgage?
A tracker mortgage goes up and down with the Bank of England’s base rate. For example, you can have a tracker that is base rate plus 2%, meaning the interest you pay will always be 2% above the Bank of England base rate.
Tracker rates can be for the entire length of the mortgage, or just for an introductory period (between two and five years), after which the rates revert to the lender’s standard variable rate (which is invariably a lot more expensive).
This type of mortgage can sometimes present the best value option. It’s also the most transparent – you know that if the base rate increases by 0.25%, so will your repayments. On the other hand, if the base rate falls, anyone on a tracker mortgage will see their repayments fall too. This is important, because lenders have been accused of not passing on discounts to customers on standard variable mortgages when the base rate has fallen in the past.
However, because the base rate can change, a tracker mortgage is still unpredictable. If you’re on a tight budget, you may prefer to choose a fixed rate mortgage instead.
Should I choose a standard variable rate (SVR) mortgage?
You should hardly ever choose a standard variable rate mortgage. They are the worst value mortgages on the market because they give lenders the total freedom to charge however much they want to.
Most people who are on a standard variable rate mortgage because their existing mortgage deal has run out and they haven’t switched to a better rate. Lenders rely on the inertia of homeowners to keep them on this type of mortgage once they have ended up on it.
You should consider re-mortgaging if you’re on a Standard Variable Rate – there’s a high likelihood that you could save yourself some money.
Is a discounted mortgage a good option?
A discounted mortgage is offered by lenders that want to attract you to their more expensive SVR by dropping their rates temporarily. The discount will be offered for an introductory period – usually between two and five years – after which you’ll be back on their more pricey mortgage.
If you’re struggling with the initially high costs of home ownership in the first few years of buying, a discounted mortgage can help significantly – but you need to consider whether this is the right option or if fixing your rates would be better. It’s also possible to find a discounted tracker mortgage, which can be very competitive.
If you choose a discounted mortgage, you need to be careful about what happens when the introductory period ends. It’s important to understand if and when you can re-mortgage, and anticipate how much your monthly repayments could increase by so that you are clear on what you can afford in the future.
Should I consider an offset mortgage?
An offset mortgage is when your lender takes into account how much you have in a savings account with them, and knocks that amount off the debt that they charge interest on. For example, if you have £10,000 in savings, and a £100,000 mortgage, you would only pay interest on £90,000.
This type of mortgage can help you to reduce the amount of interest you pay on your loan. It also gives you the flexibility to pay off more of the mortgage when you have more money, but then to reduce your payments when you need a bit more to spend.
The downside of an offset mortgage is that you won’t earn interest on the savings that you have with the lender. They also tend to have slightly higher interest rates.
First time buyer mortgages
Many mortgage companies have special deals for first time buyers, which are generally aimed at helping people get on the property ladder. These types of mortgages usually accommodate having lower deposits (i.e. the ratio of the mortgage to the value of the property can be higher) and have lower application fees.
In general, first time buyer mortgages can be very helpful at a difficult time – but do still check out the rest of the market in case there are some particularly good deals.
What about a guarantor mortgage?
A guarantor mortgage is when a relative acts as a guarantor and agrees to make the mortgage repayments if you can’t. You can usually borrow a larger amount than you would be able to on your own.
How do I find the best mortgage?
Talk to an Independent Mortgage Broker. They can talk through your personal situation and help you choose the type of mortgage that best suits your needs. They are also aware of many of the best deals on the market, and they’ll have access to broker-only offers that you won’t get elsewhere.
They are also able to look at lenders affordability as you could find that different lenders will offer vastly different mortgage amounts depending on your situation.
You can contact one of Temple’s mortgage advisers through our Contact Us page, Facebook page, or by contacting our office on 01329 282882. Alternatively, take a look at our Temple Mortgage website to find out more.
Your home maybe repossessed if you do not keep up repayments on your mortgage.