Which mortgage is right for me?
With so many to choose from, finding the right type of mortgage to suit your needs can be a daunting prospect. But, as property is probably the most expensive purchase any of us will ever make, it’s clearly something you want to get right.
There are basically two main types of mortgages – repayment and interest only. However there are whole rafts of different interest rates to consider that will affect the monthly repayments and overall cost of your mortgage.
Here’s a breakdown of the main types of payment and interest rate options available to help you find the best deal to suit your needs.
Different payment options
With repayment mortgages, you make monthly repayments for an agreed term on the amount you borrowed plus the accrued interest. At the end of the term you will have paid off the full amount and will own your property outright. Many repayment mortgages allow you to make overpayments, meaning you can pay off the debt sooner and therefore pay less interest.
With interest-only mortgages the monthly payments are used to pay off just the interest on the amount borrowed. This means your payments are lower which frees up your cash to invest in an alternative repayment plan.
At the end of the agreed term, the full amount borrowed will be due. Note that your property may be repossessed if you do not have sufficient funds to repay the outstanding balance at the end of the term.
Different interest rate options
After choosing between interest-only and repayment mortgages, the next thing to consider is the type of interest rate. There are hundreds of different combinations but the main types are:
1) Variable rate:
Mortgage repayments increase or decrease in line with the lender’s standard variable rate (SVR), which they set according to market conditions.
2) Fixed rate:
The interest rate from which the monthly repayments are calculated is fixed for a specified period of time, usually between 2 and 5 years. After this fixed period has elapsed, the rate will revert back to the lender’s standard variable rate (SVR).
3) Capped rate:
Similar to the fixed rate option, but if the SVR drops below the capped rate repayments will drop with it. Also, if the SVR rises then the rate is capped at a pre-agreed figure. Up front charges and ‘lock in’ periods are common with this type of interest rate.
4) Discounted rate:
The borrower gets a discount on the standard rate for a specific period of time. So if a 2% discount is offered on a 5% SVR, then the borrower would pay 3% and it would track the SVR at 2% lower until the end of the agreed period.
5) Tracker rate:
This is a variable rate mortgage that is linked to the movement of the Bank of England base rate. It will be set at a specified amount above the relevant base rate for a pre-agreed period of time. So, if it is set at 1.5% above base rate for 2 years and the base rate is 0.5%, then the repayments will be made at 2.0% for that period.
The mortgage market is constantly evolving with types of products being added all the time. While they may seem more complicated at first, they actually represent more choice for borrowers and could save you money in the long run.
Flexible or ‘lifestyle’ mortgages allow you to overpay or skip payments depending on how your circumstances change month to month. The benefit of these schemes is that the interest and capital owed is calculated on a daily or monthly basis, meaning any overpayment reduces the amount and the interest owed immediately.
Offset mortgages (sometimes referred to as current account mortgages) are flexible mortgages linked to a current and/or a savings account the borrower has with the lender. Any funds the borrower holds in the current and/or savings accounts will reduce the interest they pay.
Offset mortgage specialists, first direct, calculate that these mortgages can be especially tax-efficient for those in the 40% tax bracket. For example, those with mortgages of £183,000 and around £37,000 of savings could save around £36,000 if they take out an offset mortgage.
As with all major financial decisions, information is power. It’s best to do your own research and seek advice from professionals before making your choice. That way you are more likely to get the mortgage that suits your needs. For more on how to choose a mortgage, visit the Money Advice Service.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
This article has been created for information use only and any data provided was correct at the time of publication. This article is not a substitute for professional advice; please seek guidance for any financial products from qualified person or company.
first direct facts
- Winner of the Which? Best Financial Provider award 3 years running
- Top financial institution in the Which? Customer Satisfaction Survey with an all-time high of 93%
- Ranked first in the Retail Banking Satisfaction Study by J D Power & Associates for two years running
- Recently (Feb 2012) received 90% customer satisfaction in a survey carried out by MoneySavingExpert.com
first direct provides both telephone banking and online banking