Different Types of Mortgages
Just seen your 1,000th mortgage advert of the week? Yes? We’re not surprised. We know they can stack up, and this can make picking just one seem like a near impossible task. So listen up, we’re going to answer those niggling queries at the back of your head about what type of mortgage you should go for.
Which type of mortgage is for me?
Looking around for the right type of mortgage is never easy. You’ve got a million different adverts from a million different lenders telling you that they’re the best. For most this can be overwhelming. And understandably so! Where should you start? You know you need to find the right deal with the best mortgage rate but is it as easy picking the cheapest one & is the cheapest what you actually need? Surely not, right? Because then everyone would surely go with the same deal? So. Many. Questions.
But don’t worry. At Mortgages Online we are here to compare all of these different types of mortgages and moreover, explain what they actually mean. Let’s get started.
Repayment mortgages:
This is your bread and butter mortgage. With this type of mortgage, at the end of each month, you repay the interest that you owe alongside some of the capital that you’ve borrowed. Pretty easy, right? Then once you have paid all of this back you will then own your home outright.
This can be a viable option for buyers who simply want to make sure that their house is paid for once their mortgage has been completed. This is a well-trodden path for homeowners and there’s a reason for this. It’s probably the most simplistic option & guarantees you own your home outright at the end of your mortgage term.
Interest-only mortgages:
Interest-only loans are slightly more complicated. With these, you pay the interest on a month-by-month basis and then you pay the debt at the end of the term having saved it elsewhere.
While this might seem like a good idea we recommend that, if you go with this option you must have a LOT of discipline & seak financial advice. How this works is that at the end of the loan you’ll have to find the money to repay the whole debt. So, in short - make sure you save! If you don’t you could find yourself having to sell the house to pay off the mortgage. These mortgages are common with Landlords who don't necessarily need or want to own the rental property at the end of their mortgage term but are now becoming a rarer option for residential mortgages.
Fixed rates mortgages:
Fixed rate mortgages are… surprisingly… fixed. This type of mortgage is very popular at present with economic uncertainty so prevalent. This is because your mortgage rate will be fixed for a number of years. This means you will know exactly how much you will be paying in monthly mortgage payments during this time period. This can range anywhere between 2-10 years. With a fixed rate mortgage your monthly payments remain the same for the term of the fixed rate no matter what happens to bank base rates.
The only downside is that if these rates go down then yours will stay the same. However, we still recommend this as an attractive type of mortgage for those just about to enter into the property. It can provide you with security and reduce anxiety if you’re experiencing house buying for the first time.
Standard variable rate mortgages:
For those of you have fallen in love with idea of a fixed rate mortgage (or you might just think it’s a good idea) unfortunately, all good things come to an end. This means that once your fixed mortgage has finished you’re going to have to look for a new mortgage deal. Most commonly, you will go on to a standard variable rate mortgage (SVR) until you transfer to a new offer. This is a basic rate that every lender has but the interest rate each lender has as a standard variable rate varies dramatically. As the Bank of England’s base rates move, so will your mortgage rate. Lenders rarely match the base rate, but when it goes up, your interest goes up and vice versa. Finding yourself on your lenders standard variable rate is a horrible place to be as you're likely to be paying an inflated monthly mortgage payment when other deals with a far lower rate are available to you.
Discount rate mortgages:
This is a type of mortgage which will offer a reduction on the lender’s SVR. These can be a great option for buyers who want a low rate of interest but can afford more if rates go up. This is because, unsurprisingly, the discounted rates mean that the rates are… cheaper! But, as they are linked to an SVR it means that they are likely to increase and decrease alongside market trends. As the discounted rate is a discount off of the lenders standard variable rate which, as said, is controlled by the lender it doesn't offer a true reflection of the economy.
Tracker rate mortgages:
This is a type of mortgage which will be linked to the Bank of England base rate &, as the name suggests it tracks the rate exactly. If you have a 0.5% above BBR Tracker then whatever the Bank of England base rate is then your mortgage rate will always be 0.5% above. These can be a great option for buyers who want a low rate of interest but can afford more if rates go up & offer a true reflection of the economy.
Capped rate mortgages:
This is a type of mortgage that bears similarities with SVR. Though, it has a cap on how high your interest rate can rise. The upside is that your repayments will never have to exceed a certain level while you can also benefit from a decrease in interest rates. Sounds amazing, right? So what’s the catch? As mortgage rates in recent years have been quite low lenders don’t tend to offer these at the moment.
Though what this does mean is that you should keep an eye for any increase in the market to see if capped rate mortgages become available again. Well, you could keep an eye out for yourself… but here’s a better idea.
At Mortgages Online we can keep an eye out for you! We can help you to compare these different types of mortgages so that you arrive at the deal which is best for you. So don’t be afraid to get in touch!
