Given that there are many people looking to buy property, with different requirements, it is understandable that there are many different mortgage types to choose from. Each mortgage has been tailored for certain needs and requirements.
There are many things to consider if you are looking for a mortgage and if you need any guidance or advice, we are more than happy to help.
We can take you through the full range of mortgage products and help you find the mortgage that is likely to suit you best.
What to consider when choosing a mortgage?
Some things you should consider when choosing a mortgage include:
• Are you looking for a repayment mortgage or an interest-only mortgage?
• Would you prefer a tracker, fixed or capped interest rate?
• Are there any other special features which will appeal to you?
Choosing between repayment or interest only
The biggest decision most people must make is choosing between a repayment and interest only mortgage. The choice is between paying off interest and an element of the capital or just the interest.
Repayment Mortgages
When you take out a repayment mortgage, the monthly payments you make cover capital and interest in the loan. While this will be all the repayments you need to make, some lenders require you to hold life insurance to ensure the mortgage is paid off in the event of your death.
You will find that a repayment mortgage is straightforward and simple.
Interest Only Mortgages
When you have an interest-only mortgage, your monthly payments cover the interest of the loan, it doesn’t make any payments towards the capital. At the end of the term, the full loan must be repaid.
It is helpful to take out another investment or use a different saving mechanism to ensure you have sufficient capital to pay off the loan at the end of the term.
With this style of mortgage, the level of debt doesn’t reduce after each payment. You will find that there is no guarantee that the investment option you have selected to pay off your debt will be sufficient in paying off the loan. However, there are ways you can top up your investment contributions to help you save enough money.
Interest rate options
After deciding whether you will pay towards the capital or not, you need to consider your interest rate options. There are many ways of calculating the interest that is due, and some users will find some options of benefit whereas others may prefer other options. It is therefore important you find the option that is best for you.
Standard Variable Rate – SVR
This is the most straightforward style of loan and when the Bank of England changes its base rate, your interest payments will likely rise or fall. Of course, lenders don’t always react to these changes, which means you may not receive the full benefit of any drop in interest rate.
If you have signed up for a promotional rate, you will transfer to the SVR once this promotion ends and you haven’t signed over to another rate.
This is an effective option because there are no early repayment charges, but it is an unpredictable option. Some mortgage holders have found their monthly payments rising significantly due to changes in the base rate.
Discount rate
As the name suggests, this style of mortgage offers a discount on the standard variable rate provided by a lender. When the SVR changes, the rate that is paid will often change in line with the SVR fluctuation but in relation to the discount.
You usually find that larger discounts are offered for shorter periods and when the discount rate period ends, you will be transferred back to the lenders SVR.
This is a great option to make savings on the SVR but be aware that there are often significant early repayment charges associated with this mortgage, so if you wish to re-mortgage or move to another lender, it can be costly.
Fixed rate
With a fixed rate loan, the interest rate is set for a defined period. This option provides you with confidence in knowing how much you will pay each month in interest. However, if the base rate falls, you may lose out by paying a more expensive level of interest.
Capped rate
With a capped rate, you can be confident that the interest rate level will not increase beyond a set level for a defend period. If you are looking for confidence in knowing your monthly payments won’t go above a certain level, this is a smart option. However, the rates are generally higher than the fixed rate option.
Tracker rate
This option offers you confidence in knowing the rate you pay moved in line with the base rates. Of course, if the base rate increases, the amount you pay will increase, so be aware of this aspect.
Other mortgage features
Alongside the interest rates, there are other features you can consider for mortgages, including:
- Flexible mortgages
- Cashback mortgages
- Droplock mortgages
- Offset mortgages
- Flexible mortgages
A flexible mortgage is one which allows you to vary how much money you pay each month. This means you can make over or underpayments, you can make a lump sum payment if you have the means to or you can take a payment holiday.
Cashback mortgages
A cashback mortgage usually offers a lump sum when the mortgage has been arranged and taken out. This can help buyers to furnish their home or pay off any other form of debt such as a credit card debt.
It is helpful to get cash when you need it but this benefit is usually offered with the standard variable rate and there is not much flexibility with the mortgage.
Droplock mortgages
This style of mortgage allows you to start off with a tracker or discount mortgage but then change to a fixed rate mortgage without any early payment charges. If interest rates look set to rise, this style of mortgage allows you to initially benefit from appealing rates and then protect yourself from expected rises.
Offset mortgages
An offset mortgage enables you to offset your mortgage balance with any funds in savings or a current account. You pay interest on the net balance of the accounts.
Repayment methods
For those who take out an interest-only mortgage, it is important to ensure you have an alternative repayment method in place to pay off the capital element of the mortgage. There are many options to consider.
Endowment
With an endowment mortgage, you make interest payments each month to the lender, but you also make payments to an insurance firm to fund a savings policy. These savings will ensure you have sufficient funds to make capital payments at the end of your mortgage.
The savings plan can be a with-profits plan, a unit-linked plan or a combination of these plans. When you have a with-profits policy, there are two forms of bonuses. There is a reversionary style bonus, that pays into a savings plan each year and as long as the policy is active on the date of maturity, it guarantees payment. With a terminal style bonus, payment is provided on the maturity of the policy and the sum involved depends on how the fund has performed.
For unit-linked policies, the value relates to the underlying value of the investment that has been made when the policy realises maturity. If the buyer dies before the term has been completed, the loan is cleared by the life insurance aspect.
With this style of policy, you can retain it even if you move home and will often include critical illness or life cover. This is helpful because it is usually cheaper than buying both separately. Also, if the underlying investments perform well, you may receive more than what you need to pay off your loan. Of course, if the underlying investments perform poorly, you may need to find additional sums to pay off the mortgage at the end of the term.
Pension
With this form of payment vehicle, you pay interest to the lender and you also pay into a personal pension. Upon retiring, you will receive a lump-free sum (tax-free) as well as receiving taxed income. Most users use this lump sum to pay off their mortgage.
This is of benefit to many users as it can provide them with a large sum of tax-free money, however, it may not be enough to pay off a mortgage and allow you to live comfortably after retirement. Make sure you are confident this option will cover your needs and requirements in later life.
ISA
With the ISA repayment vehicle, you make monthly payments on the interest to the mortgage lender and you also make payments to your ISA. With the choice of mini and maxi ISA, you have options but make sure you know the rules relating to each type of mortgage.
If your ISA performs strongly, you may be in a position to pay off your mortgage at an early date but if your ISA underperforms, you may need to find subsequent finance to pay off your mortgage. There is also the fact that current ISA rules state you can only £7,000 per year, which may not be enough to pay off your mortgage.
Understanding mortgages
It is good that there are many mortgages to choose from but having a choice can sometimes be bewildering or confusing. It helps to know what the diverse types of mortgage are, how they impact on you and what you should consider before choosing the best mortgage for your needs. This guide has already examined the most popular or common mortgage types, but there are other mortgages that may be right for your needs.
Current Account Mortgage
A current account mortgage is like an offset mortgage in that it uses money that has in a separate account to reduce the amount of money you pay each month in your mortgage payment.
When you have a current account mortgage, you will find that your mortgage and your current account are combined into a single account, with some people suggesting this operates as a large overdraft.
The lender will usually a minimum level of money to be available in the account each month to ensure the mortgage is repaid. If there is more, you pay less interest and you can pay off your mortgage early but if you have less, you pay less each month and you will eventually have to pay more to pay off your mortgage.
If you have savings or a prominent level of income that can offset your mortgage, and you enjoy the flexibility to make larger payments if possible, this style of mortgage can be of benefit. However, people who don’t have much flexibility may find this mortgage is unsuitable.
First-time buyer mortgage
Buying your first home can be exciting but it is also challenging and expensive. You will find that some of the specialist mortgage offers have separate first-time buyer options, giving you more support and guidance.
Being a first-time buyer can be overwhelming, but if you take proper guidance and seek assistance, you should find you can manage your finances in an effective manner.
Buy to let mortgage
This is a style of mortgage that is growing increasingly popular in the UK. This style of mortgage is ideal for people who actively become landlords and the people who have become accidental landlords.
A buy to let mortgage is different from a standard mortgage because the lender examines the expected rental income with respect to the borrower. However, there is now a greater focus on the borrowers’ income and their property portfolio. A buy to let mortgage will normally require a larger deposit level.
There may also be other restrictions in place, with some lenders looking for the borrower to be at least 21 years old and to be an existing homeowner. It is also common for these loans to only be offered to properties that require a minimal level of improvement.