When it comes to choosing a mortgage, there are thousands of different types and so many deals that it can be a little daunting. Before going ahead with a mortgage, you need to fully decide which type you’d like to get – repayment, interest only, fixed rate, tracker or discounted. You need to take your circumstances and finances into careful consideration, as choosing the wrong one could cost you more than you originally hoped. With this guide to mortgage types, you can see a breakdown of each one to help you know which is the best for you.
A repayment mortgage is one the most popular types available on the market. With this mortgage, you gradually repay the money you’ve borrowed over your mortgage term, with payment going to your lender each month. Part of this goes towards the interest and part goes towards repaying the money you’ve borrowed.
This type of mortgage means that you are guaranteed to repay the full loan by the end of your mortgage term, provided you make your repayments in full each month. This can make it easier to get a cheaper mortgage deal in the future, as the larger the amount of equity you own in your home, the better the deals you’ll be able to get.
Interest only mortgage
This is another main type of mortgage, and with interest only, you only pay interest to your lender each month and you don’t pay off any of the capital until the end of the mortgage term. You will need to make other arrangements for paying back the capital, which mortgage lenders describe as setting up a ‘repayment vehicle’. This usually means paying a separate amount into an investment, such as stocks.
Taking out an interest only mortgage is quite risky, as there is no guarantee that the investment will be worth enough to pay off the full mortgage at the end of the term. However, this is something that a mortgage adviser like Mortgage Solutions can help you with.
Fixed rate mortgage
A fixed rate mortgage has an interest rate that stays the same for a set period, which could range from two to ten years. Your repayments are the same every month, so you don’t need to worry about fluctuations in interest rates. No matter what happens to the Bank of England’s base rate or the lender’s standard variable rate (SVR), your interest rate will remain the same. This is particularly attractive to first-time buyers or homeowners on a tight budget.
As you know the fixed rate of your repayments, you can budget for other household costs more easily, and you have the security of knowing how much you’ll pay each month. However, the fees for arranging a fixed rate mortgage are usually higher than variable options, as you’re paying for the security.
This is a variable rate mortgage in which the interest rate tracks the Bank of England base rate at a set margin above or below it. Trackers can last for as little as a year or as long as the total life of the loan, but once the tracker deal comes to an end, you’re likely to be automatically transferred onto your lender’s SVR, which usually has a higher rate of interest.
In certain economic circumstances, borrowers can secure track mortgage deals with very low rates of interest, so while the rate is low, you can take the opportunity to overpay on your mortgage. This will either reduce the total length of time it will take you to pay off your mortgage or give you the ability to make smaller monthly payments afterwards. It is a highly variable mortgage type, though, as if the base rate changes, so too will the interest rate you pay, so it isn’t very secure.
As SVRs are typically uncompetitive, some lenders attract new customers by offering discounted mortgages. For an introductory period, the SVR will be discounted – usually between two and five years – before reverting to the SVR again. They can be very useful to people that are struggling with the high costs of owning a home in the first few years after buying. They don’t have the certainty of fixed rates, but they are usually lower.
Although they sound like a good deal, discounted mortgages aren’t necessarily the cheapest mortgages rate you can get. As this is a variable type, the interest will fluctuate, and you won’t have the security of knowing how much you’ll be paying each month. However, the arrangement fees are usually quite low in comparison to other types.