Mortgage Types
There are quite a few different types of mortgage available to you, your mortgage broker should advise you on what types might be suitable to you, but it’s best to have a read and think for yourself to begin with, that way you have a reasonable idea of what they are talking about.
First you have to choose the type of payments you want to make.
Repayment
With a repayment mortgage, you have to pay both the interest on the money you’ve borrowed and a certain amount of the money outstanding. When you take the mortgage out, you decide on a term, usually 25 or 30 years, which determines how much of the money borrowed you repay per month. This way after the length of your mortgage term, you wont owe anything.
Interest only
An interest only mortgage is sometimes the route taken when people can’t afford to make repayments just yet. In this instance, you don’t actually pay back any of the money you borrowed, you just pay the interest. If you borrow £100,000 and pay the interest for ten years, you will still owe £100,000.
Next step is to choose the type of interest rate you would like to use. This can be particularly difficult, especially if economics isn’t your strong point.
Fixed Rate Mortgage
With a fixed rate mortgage, you pay a fixed rate of interest, usually just above the Bank of England base rate. You pay this rate for a fixed term, which can be anything from 2 to 10 years depending on the fee and rate offered by your lender, after which the rate is usually changed to the lenders standard rate. The advantage of a fixed rate mortgage is that for the initial term, you know exactly how much your repayments are going to cost, no matter what the markets are doing. This safety net could come at a cost if the interest rates crash, but it’s a risk lots of people take. Due to the popularity of Fixed Rate Mortgages, the reasonable cost and the security, there is often a higher fee.
Tracker Mortgage
A tracker mortgage is fairly simple. With a tracker, the interest rate you pay is always a certain amount above the Bank of England base rate. For example if your rate is set at 0.5% above the base rate and the base rate is 5%, you’ll pay 5.5% interest. If the base rate then moves down to 4.5%, you’ll only pay 5% interest and so on. If you think that the Bank of England base rate is going to drop, a tracker could well be the right mortgage for you, but beware that you never quite know how much you’ll need to pay in the months to come.
Variable Rate Mortgage
Like a tracker mortgage, variable rate mortgages often follow slightly above the Bank of England rate, but in this instance the rate is at the Lenders discretion. The rate is called the Lenders Standard Variable Rate (SVR). If the Bank of England rate moves up or down, most lenders would match the move, but they don’t have to. They usually do so that they can compete with the other lenders, but it’s not guaranteed.
Discount Rate Mortgage
This is the same as a variable rate mortgage, except that for an initial term the lender will give you a discount off their SVR. For example the lender might give you a rate of 1% below their SVR for an initial two year term.
Offset Mortgage
Offset mortgages are a neat idea, they allow you to offset any savings you have against the money you owe. For example, if I owe the mortgage lender £100,000 but I have £20,000 in my savings account, I only have to pay interest on £80,000. Lots of people see this an think what’s the point? The point is, that you save much more on the interest that you are not paying than the interest you would earn even in a high interest savings account. And of course it shares the sames benefits of having the money to hand whenever you need it. It is not uncommon for some people to lend more than is necessary for a house purchase on an offset mortgage and leave the excess in the offset account. That way it is effecting their payments, but they always have the cash there if they need it.