What’s the difference between the main types of mortgage?

Author: Dave Mills

First time buyers, in particular, are often uncertain about what kind of mortgage is best for them. This is perfectly understandable. After all, there are many different products available from a broad spectrum of lenders. Each option is likely to have advantages and disadvantages for you as a home buyer. The aim is to strike the best balance to serve your ongoing interests. Here we examine the unique features of some of the most popular mortgage products on the market today.

Fixed rate mortgages

This option is very popular with first time buyers. That’s because it provides certainty for a given length of time. When you agree to borrow the capital for your home, you’ll commit to a series of monthly repayments of the same amount for the duration of the agreement. Typical fixed rate periods are between two and ten years. Importantly, each month your payment will cover the interest owed on the loan as well as a repayment. This means you are paying off the debt and edging closer to owning your home outright. You will notice month-by-month that you pay less interest, with more of your money going against the loan. The main disadvantage with fixed rate mortgages is that if mortgage rates become cheaper, you will be stuck paying the same amount.

Variable rate mortgages

Most lenders offer what they call a standard variable rate mortgage. This means the monthly repayment amount can go up or down depending on factors such as the Bank of England base rate of interest, or a change in market dynamics that influences retail rates. Again, each month your payment will cover the interest owed on the loan as well as a repayment. Variable rate mortgages don’t provide the same level of certainty as fixed rate mortgages; however, they are ideal for people who expect mortgage rates to decrease. They are also likely to have a more attractive headline rate of interest to entice you to sign up. You should be aware that if interest rates rise sharply, or there are dramatic changes in the marketplace, your monthly repayments could skyrocket. This could ultimately make your home unaffordable.

Tracker mortgages

Tracker mortgages are another popular type of loan. These track the Bank of England’s base rate of interest. If interest rates go up, then your monthly repayments will increase, and vice versa. For example, if the base rate is 1% and your retail add-on is 1.5 %, then you will pay 2.5% interest. Again, each month your payment will cover the interest owed on the loan as well as a repayment. As with variable rate mortgages, a sharp rise in interest rates could see your monthly repayments rise substantially, possibly making your home unaffordable.

Interest only mortgages

These products do exactly what they say on the tin. You own your home in terms of your name being on the deeds, but you will acquire no additional equity beyond what you have laid down in your deposit. Interest only mortgages are good for people who want low monthly payments. They are also popular with buyers who expect house prices to rise. That’s because during their tenure of the property any increase in value will represent a profit on the venture. Interest only options may also suit people who intend to move to a smaller property or less expensive area in the short to medium term. Other people opting for this kind of product include those who expect to have the capital to pay off the loan at the end of the contractual period or when they retire.

#Remember

Most mortgage deals give you the opportunity to make additional payments. If these exceed more than a specified amount of the outstanding loan in one year, say 10%, then you will most likely have to pay a penalty charge.

If you would like more information about the features, advantages and disadvantages of the various mortgage products available, please contact us now.

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