Finding the right mortgage is as important as finding the right house. Not only does the right mortgage save you time and money but it provides you with peace of mind.
Listed here below are some of the types of mortgages on offer:
Standard variable rate: This is based on the Lenders basic mortgage rate and, as the name suggests, the rate fluctuates depending on the Bank of England base rate. Mortgage Lenders are entitled to decide whether to follow the Bank of England base rate and alter their own interest rate accordingly.
As a result, a potential Borrower should be aware that with this type of mortgage, any increase in the Lender’s interest rate will result in an increase in your monthly repayments. Conversely, a decline in the interest rate may lead to a fall in your repayments (Lenders do not always pass on reductions/increases to borrowers).
Fixed rate: This gives the Borrower reassurance in the fact that monthly payments over the fixed period of the Mortgage are unchangeable regardless of the Bank of England base rate. However, once this period is concluded, the rate will usually revert to the Mortgage Lender’s standard variable rate.
Should you decide to take out this type of mortgage and the Bank of England base rate falls, you could end up paying significantly more each month but, if the base rate rises, there is no change to your repayment amount.
Fixed rate mortgages give the Borrower the benefit of being able to predict likely expenditure and therefore it makes it easier to budget in the early years of the mortgage term.
NB: In most cases, early repayment will result in charges being levied and it is worthwhile establishing in advance what these are.
Capped rate: The rate of your repayments is capped for a specified period and a maximum amount (“ceiling”) is stipulated which does not take in account any increase in interest rates.
However, in order to enjoy the benefit of this security, the Lender is at liberty to increase the interest rates payable in your mortgage. If the interest rate falls below the capped level, this is passed on to you and your monthly repayment will be decreased.
NB: The availability of this type of rate can vary.
Discounted rate: As the name suggests, with this type of mortgage you get a percentage discount from the Lender’s standard variable rate for a specified period of time. However, you are still subject to any rise and fall in the in the standard variable rate and your monthly repayments will be affected accordingly.
The benefit of the discounted rate is that initial payments are lower, although higher interest rates will be charged later on because, once the discount term ceases, your repayments will increase to the level of the full standard variable rate.
NB: Early redemption penalties are applicable in some instances. Discounted rates are suitable for people who would like lower initial payments at the expense of higher interest rates later on.
Cash back: This is attractive to the first time buyer but the lump sum offered by the Mortgage Lenders may be outweighed by the fact that the mortgage to which the cash back is linked is not usually on fixed or discounted interest rates.
Many Lenders may also request that once the agreed term has expired, the Borrower agrees to take the standard variable rate meaning that you are unable to secure a further deal for some time.
NB: Again check out the early repayment charges.
Tracker rate: Quite simply, your rate of interest reflects that of the Bank of England base rate. You are not at the mercy of your Mortgage Lender and their standard variable rate but this does not prevent your payments increasing or decreasing each month if the Bank of England base rate alters.
Buy to let mortgage: These are tailored for investment properties only and usually there is a ceiling of 85% of the property value. The would-be Landlord must be able to demonstrate that the rental income will exceed mortgage repayments by a certain percentage.
The Lender will also wish to be satisfied that the property to be purchased is a good long term investment.
NB: Do not forget that there will be additional costs involved such as Rental and Legal Expenses cover, insurance premiums for Building and Contents, Letting Agents’ commission, property maintenance and service charges and ground rent (leasehold properties) to name but a few.
Repayment mortgage: This obvious advantage with this type of mortgage is the guarantee that your loan is paid off in full at the end of the agreed period of time (assuming that you have not missed any monthly payments).
The monthly payments are calculated to include interest of the loan itself and repayment of the capital sum. You can therefore see the amount of your debt reducing each month and there will be no hidden “surprises” at the end of the term.
Interest only mortgage: Your repayment is based on the interest of the loan only and the outstanding amount is not repaid until the end of the term of the mortgage.
Monthly repayments normally consist of Interest on the amount borrowed, Life Assurance and Contribution to an Investment Plan (an Endowment or similar) which is designed (although not guaranteed) to pay off the outstanding capital at the end of the mortgage term.
Traditionally, monthly payments on Interest only mortgages are lower than a repayment mortgage but you also have to consider the cost of the Investment Plan in your monthly payments.
NB: As noted earlier, the risk with this type of mortgage is that there is no guarantee that the Investment Plan you choose will yield adequate capital to enable you to pay off the outstanding debt at the end of the mortgage term.
Flexible mortgage: There are many varying degrees of flexibility but to be genuinely flexible, this mortgage should allow the Borrower to take payment holidays, make over or underpayments, borrow back any overpayments, calculate interest on a daily basis and carry no redemptions penalties.
There are many flexible mortgages on the market and some may offer one or more of the above criteria, whilst others offer them all.
NB: Due to the attractiveness of this type of mortgage, it is recommended that you conduct a thorough investigation in order to ensure that the flexible mortgage you choose is right for you.
NB: Many of the mortgages described above may offer the benefit of overpayments but this is usually restricted.
Finally, and above all, it must be noted that YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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These figures are not quotations or an offer of mortgage and should be used as a guide only.
The mortgage amount shown is intended as a guide only. The actual amount you will be able to borrow could be more or less than this figure and depends on your personal circumstances.