Choosing a mortgage is about more than just finding a good rate. It’s a decision that should take into account you finances, your lifestyle, your attitude towards risk, and a bit of crystal ball gazing too.
Below is a run through of the basics: different repayment methods, different loan types, some special cases, and some pitfalls to avoid.
Paying it back: Repayment or Interest Only
At the most basic level, the first choice you have to make is whether or not you take out a repayment mortgage, where you pay off some of the money you have borrowed each month, plus the interest owing.
Or you could opt to fort an interest only mortgage, where you pay off no capital. Your monthly outgoings will be reduced, but you do need to find some way of repaying the amount borrowed, such as an investment ISA, or a pension scheme.
It is also possible to go the interest only route for the first few years of your mortgage and then switch back to a repayment loan. This can be useful for first-time buyers who think their income will rise – but be prepared for the higher monthly costs when you switch to the repayment deal.
Standard Variable Rates & Other Deals
Next you will have to decide which type of mortgage product suits your circumstances the best.
Lenders have a basic rate, called their Standard Variable Rate, which tracks, but is usually higher than, the Bank of England’s Base Rate.
However, lenders also offer special mortgage deals for specific time periods – when the deal expires you go onto the Standard Variable Rate. At this point you can choose another deal or remortgage with another company.
Here are some classic deals offered by lenders:
The favourite for borrowers on a tight budget, a fixed-rate mortgage guarantees you the same monthly payment for the lifetime of the product. The rate of interest may be slightly higher, but the ability to fix your payments for in between one and ten years can be worth it for peace of mind.
Although there is often talk of 25-year fixed-rate mortgages, a period of two to five years is more usual, with the interest rate increasing with the length of the product.
With a discounted mortgage you benefit from a low interest rate for any given period, usually a few percent off the lender’s standard variable rate (SVR) for a year or two. This may offer a cheap headline rate, but is more risky proposition. Any changes in your lender’s SVR will affect your monthly payments so you need to know you can cope with a rise.
These are similar to discounted in that you start off on a low initial rate, which then ‘steps up’ to a higher rate after a period of time, but both rates are fixed in advance. The general rule is the lower the rate, the higher the stepped rate.
A tracker is much like a discounted mortgage, but it shadows the Bank of England base rate for an agreed period of time, e.g. 0.02 percent above base rate for two years. This can be the cheapest mortgage on the market, but it carries the risk of higher monthly outgoings if the bank base rate rises.
With advantages of both the fixed and variable rate mortgages, a capped mortgage insures you against interest rises over an agreed level, but if the interest rates fall significantly your monthly payments can come down too.
Of course, for such a good option, you will often pay a higher interest rate.
Designed to suit the needs of borrowers, rather than lenders, a flexible mortgage allows you to make overpayments, and take payment holidays as your finances fluctuate.
However, flexibility comes at a price, as you may find that the higher rate is not worth it when many more conventional mortgages are now offering similar features.
The idea of a cash-back mortgage is that on completion the lender gives you a lump sum, either a fixed amount, or a percentage of your loan, to spend on whatever you want. But, for your cash handout you will have to put up with a higher interest rate, and you will be tied into the deal for a set period, so make sure you wouldn’t be better off getting your lump sum elsewhere.
Strictly for those with substantial savings, an offset mortgage uses your funds to offset the mortgage. So, if you have a £100,000 mortgage and £25,000 savings, you will only pay interest of the £75,000 difference. It’s a good way to make use of your savings, it’s tax efficient if you pay a higher rate tax, and it means that you can pay off your mortgage quicker, but you may pay a higher rate.
Working out whether or not an offset mortgage will save you money can be complicated, and it is probably worth taking advice from a mortgage adviser.
Self Certification Deals
If you are self employed and don’t fulfil the lenders’ usual requirements you may be able to get a self-certification mortgage. Obviously, if you aren’t in secure employment you pose a bigger risk to lenders, so you can expect this to be reflected in the interest rate, although the bigger the deposit you can put down, the better rates you can find.
Self-certification mortgages are available as all the usual types of product – fixed rates, capped rates, discount rates tracker rates and buy-to-let.
If you want to invest in a rental property you will need a buy-to-let mortgage.
You will typically have to put down 20-25 percent of the property’s value as a deposit. The final decision on whether to lend you the money is usually based on either a combination of your income and the rental potential, or solely on the rental potential of the property.
Because there are so many mortgage options available why not contact online estate agents turtle homes and we’ll put you in touch with a whole market mortgage broker.