Which Mortgage Is Right For You?
Navigating your way through the mortgage market may seem an overwhelming and intimidating process, especially given the abundance of available mortgages and mortgage providers.
However, finding the right mortgage means finding a mortgage tailored to meet your needs, taking into consideration your lifestyle, age and financial situation.
Nevertheless, even after taking these factors into account, you will almost certainly be faced with an enormous variety of mortgages and differing interest rates. This section aims at explaining the difference in mortgage types and the interest rate types available to you.
There are two mortgage types available to you:
Repayment
A Repayment Mortgage is structured so that the monthly mortgage payments, comprising partly of capital and interest, pay off the original amount borrowed as well as the interest that would be accrued over the mortgage term, by the end of the term.
A Repayment Mortgage is clear-cut and uncomplicated. It is a surefire way of repaying the loan provided that all payments are made and kept up with. The amount that you owe decreases as time goes on. As interest rates go up in later years, it will not have as much of an influence on the amount owed due to the fact that the capital has decreased. Although in most cases it is not compulsory to arrange life cover to protect the mortgage, it is worthwhile to arrange at least life cover to ensure the loan can be repaid in the event of your death and to avoid the house having to be sold in order to repay the mortgage. It is prudent to protect yourself and your mortgage against an onset of a specific critical illness. This will mean that you mortgage is repaid in full in this event, leaving you to the more important task of recovering.
Interest Only
These are so called due to the fact that you only pay interest to the lender each month. The original loan amount remains the same for the term of the loan. Therefore, suitable investments are planned in order to repay the loan at the end of the term. These investments are arranged at the beginning of the term and they include Pension Mortgages, Endowment Mortgages, PEP Mortgages, ISA Mortgages, and so on.
The amount originally borrowed on Interest Only mortgages does not change because you only pay off the capital at the end of the term. This is done by contributing towards the "Repayment Vehicle" (i.e.: the investment(s)) chosen, which aim to earn a sufficiently large sum to repay the loan at the end of the term.
Although there appear to be many types of Interest Only mortgages, this is only due to the fact that the name is associated to the relevant investment. Even though the investments vary, the general nature of the Interest Only mortgages remains the same.
These mortgages are deemed to be high risk in nature. This is because the repayment vehicle, i.e the investment, is not guaranteed to appreciate in value, as they are usually stock market based. If the investment does not provide as good a return as was expected, it may not cover the loan. The onus is then on you to ensure that you can repay the loan at the end of the term.
Investments associated with Interest Only mortgages are portable meaning that you can keep the investment, add to them and link them to a new mortgage if you move house. Also, as a result of the original amount borrowed never going down, if you sell your house, the entire amount borrowed will need to be repaid.
So, now you know what types of mortgage are available to you, what about the types of interest rates? So many choices aren't there? Don't worry about getting confused with either choosing the right mortgage or interest rate type for you. Through discussions with you, we can come up with the right mortgage that suits your needs, lifestyle and income.
Interest Rate Types
There are a variety of interest rate types available to you. These are:
It is important to note that interest rates can fluctuate with very little warning. Therefore this is another important area, which must be seriously thought about due to the different types of interest rates that are available and their implications.
Current mortgage interest rates depend on the financial markets. As these rates fluctuate, so too can the amount you pay each month. However, mortgage lenders put together "Special offers" to entice you to buy from them. Some of these special offers include fixed, variable and discounted offers.
Each of these offers has advantages and disadvantages. For example, you may think that interest rates are going to decline so you settle on a variable rate but if the rate goes up, you will have to pay more. Whereas a fixed rate remains static for a set period of time so that you have a set rate that you pay each month, irrespective of the actual rate at that time.
Lets go through them one by one…
Fixed Rate Mortgage |  |
This type of mortgage allows you to keep a static rate of interest for a specific period of time, i.e. as its name suggests, you will be fixing the rate of interest that you pay at a given level, keeping your monthly mortgage payments level, irrespective of interest rate fluctuations.
The Benefit of this is BUDGET PLANNING. You will know exactly the amount being deducted from your bank account each month, even if the interest rates increase significantly. The Drawback of this is that if interest rates FALL during your fixed rate period, you will be paying more during this time, making it costly for you.
On average, fixed interest rates are more expensive than other mortgages and usually incur a booking or arrangement fee payable to the lender. This is because of the budget certainty safeguards that they offer.
When the fixed rate period is finished, you will revert to the lenders standard variable rate. If you want to repay your mortgage in full or if you want to remortgage away from the fixed rate, you will incur a redemption penalty.
Discounted Rate Mortgages | |
This type if interest option will give you a percentage reduction off your mortgage lenders standard variable rate. The discount will only apply for a specific period of time.
The Benefit of this is that when interest rates drop, so do your monthly payments, ensuring that you are not paying "over the odds" for your mortgage.
The Drawback is that you will not have the budget certainty as with a fixed rate. You will be at the mercy of interest rates and if you do not have a good level of disposable income available to you, the monthly repayments, living costs and savings may stretch your budget to the limit. You may find that what was a comfortable level of outgoings soon becomes unaffordable. Again, if you repay or remortgage away from your lender during the fixed rate period, you will have to pay a redemption penalty.
Tracker | |
Tracker mortgages work on the same principle as discounted rate mortgages. The interest rate that you pay stays within a given level of the Bank of England Base Rate. It will experience the same fluctuations as above and has the same benefits and drawbacks.
Standard Variable Rate Mortgage | |
There is nothing special about variable rate mortgages. It is the rate that is standard to lenders. As its name suggests, the rate is variable i.e. it moves in line with Bank of England increases and decreases.
Capped Rate Mortgage | |
These rates limit your payments to variations between a minimum and maximum rate for a set period of time.
Cashback Incentive | |
As another "Special offer", companies offer cashback as another incentive to use their products. With cashback the lender will give you a sum of money on completion of the mortgage. For this type of offer, you are usually restricted to the standard variable rate for a set period, and have to repay some or all the cashback if you wish to redeem your loan sooner.
Current Account Mortgage | |
Your mortgage and current account is put together into one large bank account, still giving you the ability to use your account as you normally would. The mortgage account is offset against the credit balance in your current account and the monetary amount of interest that you pay is adjusted accordingly. This is because if you are in credit with your current account and credit interest is payable to you, you will be paying the mortgage company interest on your mortgage; you will be paying the difference between the two figures.
The Benefit of this is that you reduce the amount of interest payable on the mortgage account. There is a flexible facility with this style of mortgage too.
The Drawback of this is that you may want to keep both accounts separate and are concerned by the fact that you will be getting a monthly bank statement showing that you are constantly overdrawn by a considerable sum!
Flexible Mortgages | |
This is a relatively new type of mortgage that, as the name suggest, is flexible. It is structured so that you can overpay, underpay and even take payment holidays without incurring any penalties. Most flexible mortgages have their interest calculated daily, bringing about the full benefits of overpaying. Regularly overpaying the Flexible Mortgage without later underpaying could lead to the mortgage being paid off sooner and save you thousands of pounds in interest.
Flexible mortgages permit overpayments and underpayments on mortgages and allows all overpayments to be drawn back. It gives you the option to repay your loan before the end of the term by overpaying. Usually interest is calculated daily giving the benefit of saving you money when overpayments are made, even if the money is drawn back at a later date.
Flexible mortgages allow you to vary the amount you pay, either overpaying it, under paying it or taking payment holidays as long as you do not exceed your original mortgage threshold.
Some enable you to use your mortgage account as a current account, giving you the ability to pool your money with the standard current account options of a cheque book and debit card. Also, you may prefer to link a savings account to your mortgage, offsetting interest due on your savings against interest payable on your mortgage. This also offers tremendous savings in interest. There are generally no penalties for redemption of the mortgage.
The flexibility side allows you to make overpayments to your mortgage either annually or monthly. Provided that you have made the overpayments, you have the ability to make underpayments for a period of 3 months. You can also borrow up to 80% - 90% of the value of your home again without prior sanction.
The Benefit of the flexible mortgage is that when you make overpayments, you will reduce the total amount of interest payable over the term. Also, you will trim years off your mortgage term. The Underpayment facility allows you to cut one outgoing when times are lean or when there is a large expense due. The additional borrowing facility allows you to extend the level of borrowing for whatever purchase you need to make, without the hassle of completing further paperwork. A telephone call to your lender requesting the funds is all that is required. There may also be a cheque book facility, allowing you to draw funds using a cheque. This facility varies from lender to lender. And it also provides an excellent place to house spare money. This is due to the fact that interest saved on your loan will normally outweigh the amount you would normally receive from a savings account, even prior to income tax, which usually affects savings accounts.
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