Once you’ve worked out your finances, picked a house and chosen your lender, you need to get down to the business of choosing the actual mortgage product for you.
There are several different types of mortgage you could take out when looking to purchase a house. Firstly you must choose between a repayment or interest only mortgage.
A repayment mortgage will see you paying off the interest you accrue on your mortgage as well as some of the capital cost with each monthly installment. Interest only mortgages deal solely with the payment of the interest on the loan. This means that at the end of the loan you will still owe the total cost of the house. Borrowers with these mortgages will look to take out a separate investment that matures at the end of the mortgage period and, at least, covers this cost. A repayment mortgage is the more common option.
The interest rate and fees charged are important in any mortgage taken out, as are the terms of the repayment. There are a number of different types of mortgage that offer different levels of security for the borrower:
Fixed rate: With these mortgages the interest rate you pay remains the same or the duration of the deal. This will typically be two to five years at one rate, after which you can negotiate a new deal. This offers certainty when planning out your finances but the deals are typically higher than those with a variable rate.
Other mortgages come with a variable interest rate, these include:
Standard variable rate (SVR): This is the normal rate charged by a lender outside of any deals or offers they have on. If you finish a fixed rate deal you will be transferred onto this. A rise or fall in the base rate from the Bank of England will directly impact on what you pay but you would have the freedom to leave or change your deal at any point.
Discount mortgages: This is an offer made by a lender, typically a percentage ‘off’ the SVR for a set period of time. So, if the lender’s standard rate is 5%, they might offer 2% discount for two or three years. The trick is to consider both the SVR and the amount of discount as a larger discount from a higher starting point won’t necessarily be the best deal. The important figure is the interest rate you’ll be left paying after all. Rate rises and falls will impact on what you pay each month, making budgeting a little tougher.
Tracker mortgages: Tracker deals follow an interest rate that is usually set at the ‘base rate plus a set percentage’, normally for a fixed period of years. This gives you a very direct link to what the Bank of England does and your own repayments.
Capped rate mortgages: This is a mortgage in which the interest rate moves in line with the SVR but is capped at a maximum level. This allows you to budget for a ‘worst case scenario’ and removes some of the risk associated with variable rate mortgages. However, this does typically mean paying more than with some other deals.
Offset mortgages: Each month your lender calculates the total interest you owe based on the total you have borrowed minus the amount held in a linked savings account. So if you borrow £150,000 and have savings of £10,000, you will only be paying interest on £140,000.
On all of the above deals you must make sure you’re aware of the exit penalties for leaving before the end, just in case.
There are lots of variations on the market, take the time – and advice – to make sure you fully understand a product and that you get the choice right to leave yourself on a sound financial footing. Weigh up the security and affordability of each deal and make sure you cost out a ‘worst case scenario’.
When taking out a deal for a number of years make sure you think ahead. If your family or work circumstances are likely to change in that time, bear that in mind.