When you start looking for a mortgage, things can quickly get confusing; especially for first time buyers who have limited experience. Many people will choose a mortgage based purely on the mortgage rate; whilst this is the most important factor, there are other factors to be aware of which could impact the type of mortgage you decided to get.
How mortgages work
All mortgages serve the same basic function. You borrow money from a mortgage lender to buy a property and then eventually pay it back with added interest. The interest rates are charged as a percentage of the total amount borrowed. However, different mortgages will have different interest rates, different repayment options, and various charges to pay. So let’s take a look at the different mortgages available.
Joint mortgage
Whilst not necessarily a mortgage type in itself, a joint mortgage is a popular option for many people. A joint mortgage is a mortgage which is taken out by more than one person with both parties responsible for making the repayments. They are most commonly taken out by married couples or partners but can also be a good option for friends or family members. Joint mortgages allow for a larger sum to be borrowed when compared to an individual’s mortgage.
Fixed Rate Mortgage
A fixed rate mortgage is one where the interest rate remains fixed throughout a previously agreed term. They will usually be advertised as a two or five years fix. However, ten year fixed mortgages aren’t unheard of. Whilst this type of mortgage will provide a peace of mind with your monthly payments, they are usually slightly higher than other mortgage types. You could also lose out if mortgage rates fall.
Standard Variable Rate Mortgages
Like a fixed rate mortgage, variable rate mortgages will have an interest rate that is paid each month. However, standard variable rate mortgages (SVR) will have a rate that is set by the lender, which they can change at any time.
Tracker Mortgage
With this mortgage, the interest rate can change each month as it tracks the Bank of England’s base rate. This mortgage type can have its advantages if the tracked rate falls, as your mortgage payments also falls. However, equally, if the rate rises, so will your payments.
Discount Mortgage
With a discount mortgage, you will pay the lenders standard variable rate but with a fixed amount discounted, typically for 2 to 5 years. These are usually the cheapest option and are very popular with first time buyers. However, as they’re linked to the lenders SVR, the rate can change as the SVR changes.
Capped Rate Mortgage
This type of mortgage is a variable rate mortgage but one with a limit on how high your interest rate can rise. This means that you have the security of rising interest rates, whilst still benefiting if the rates go down.
Offset Mortgage
Offset mortgages combine a borrower’s savings with a mortgage. When the monthly payment is due, the lender will look at how much is owed on the mortgage and then deducts the amount you have saved, giving an interest rate based on the difference between the two. For example, if you have a mortgage of £200,000 and savings of £10,000, your interest rate is calculated on £190,000 for that month. Whilst this reduces the amount of interest you pay, the mortgage rate will likely be more expensive than other mortgages. This type of mortgage is useful if you have a large amount of savings.
We have also provided the current best mortgage rates for this week, using a property value of £350,000 and varying LTVs of 10%, 20%, 50%.
If you’re thinking of buying or selling, or would like to know the value of your home, get in touch! We can be reached on 01603 300900 or by email: [email protected]
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