If you’re looking for a residential mortgage you will be familiar with the plethora of deals, offers, and rates on offer. If you’re in the market to buy a home or remortgage your existing property, the array can be overwhelming. But it’s not just the deals and offers presented by lenders, but the different types of mortgage on offer as well. And of course, what is the best type of mortgage to get right now?
So what are my mortgage options?
The answer to the question of what is the best type of mortgage for you will depend on your personal circumstances, your requirements for a home for you and your family, finances, affordability, and so on. It’s always a good idea to seek out professional advice to understand what the different types of mortgage mean to you, the cost and whether they’re a good fit for what you need. Here’s more information about how we can help.
Standard Variable Rate Mortgage
Every lender has a standard variable rate SVR that it bases all of its products on. It will differ from lender to lender, and while it’s not directly linked to the Bank of England Base Rate of Interest, they are often affected by it, as we are finding out during 2022. Typically a standard variable rate mortgage won’t have a term or an Early Repayment Charge.
The standard variable rate of interest is, however, generally higher than the rate you could expect if you entered into a fixed rate deal, for example. So you can expect to pay more in interest rates alongside paying off the capital.
It is a variable rate, which mortgage lenders can change at will. This means that your payments could change from month to month, either up or down. Changes are impacted by the cost of borrowing, the Bank of England Base Rate, and a number of other factors.
It is a good idea to always keep your mortgage under review to see if there is a better, cheaper deal. But it’s important to consider this option as it could be the best type of mortgage for you under certain circumstances.
Fixed Rate Mortgages
As the name suggests, the rate of interest is fixed for an agreed term. Borrowers usually take out two year or five year fixed rate mortgages, but other terms are available, depending on the choice of lender.
At the end of the fixed term, the lender will move a borrower onto their standard variable rate, which is typically more expensive.
The benefit is that should interest rates rise, as they have done throughout 2022, the interest rate and therefore monthly repayments do not rise. On the flip side, however, if mortgage rates fall, the fixed rate stays in place and repayments stay the same. For the period of the fixed term, the cost of repayment is known, so households can budget accurately.
Fixed rate mortgages are a good way of riding out economic pressures where inflation and interest rates rise because nothing changes until the end of the term. Towards the end of the term, it is always a good idea to consult a mortgage broker for the next deal. Typically offers have a six month lifespan, so can be done ahead of time for a smooth transition into a new mortgage.
As the name suggests, tracker mortgages track the Bank of England Base Rate. The lender will add a percentage to this. So if the base rate is 2%, the lender adds 2%, and the interest rate for the mortgage is 4%.
This will track the Base Rate, so it fluctuates up or down accordingly. The percentage added by the lender stays the same.
The borrower can save money if the base rate is trending downward, but if it rises, so do monthly repayments.
Tracker mortgages have an initial term in the same way that fixed rate mortgages do, and the mortgage will move onto the lender’s standard variable rate at the end of this term.
These are similar to tracker mortgages in that they track the Base Rate. But in this case, there is a discount rather than a percentage added. So if the Base Rate is 3% and the discount is 1%, the interest rate for the mortgage is 2%.
Remember that this will also fluctuate with the Base Rate in the same way that a tracker mortgage does. Discount mortgages come with a fixed term, after which the mortgage will go onto the standard variable rate of the lender.
Interest Only or Repayment?
Whatever the term or type of mortgage you take out, they are split into two categories. Interest only, or repayment. But which one is the best type of mortgage for you and your circumstances?
Interest only mortgages repay only the interest every month. So at the end of the term, you will still have all of the original capital to repay. Lenders usually require a repayment vehicle to be in place. That could be something like an ISA, part of a pension, or equity investments for example.
The actual mortgage payments are lower than repayment mortgages, but you still have to make arrangements to raise the capital to pay off the original loan.
In the case of repayment mortgages, you pay off capital and interest every month. So the monthly payments are higher, but at the end of the mortgage term, you’ve paid everything off and the house is yours. There are pros and cons with both types of mortgage, and numerous mortgage deals to consider, as well as the monthly costs, and what happens at the end of the mortgage.
Taking professional advice can help you to understand the minefield that is mortgages, and get the advice that you need to make the right decision to buy a property for you and your family.
Quite simply, a joint mortgage is one that allows you to buy a house with a partner, friend or family member. Both parties will be named on the mortgage, and both will be subject to the application, eligibility criteria, and so on. Both parties will be subject to credit checks too.
They can greatly increase your buying power if both parties are working as income is calculated on both salaries, not just one, opening up the possibility of buying a more expensive property. With property prices as they are, this can be particularly helpful for first time buyers. For a couple, this could be the best type of mortgage, but there are considerations including mortgage protection, and what happens if things go wrong. Always take professional advice.
There are a number of specialist mortgages available to people who may find it more difficult to access mortgage finance. These are designed for specific purposes, and you should always take advice on the best type of mortgage for your circumstances. We’re always asked “what type of mortgage loan is best for me?”
Bad Credit Mortgages
There are specialist lenders who can often help people who may have a poor credit score, or have been bankrupt or insolvent. Mortgage interest rates usually reflect the level of risk that they consider people with poor credit scores can represent, so mortgages are often more expensive.
This type of mortgage requires someone to act as a guarantor. That means that they will guarantee to pay the mortgage back if you are not able to. Typically this would require the use of savings or property to demonstrate that they can afford to do so. This can be helpful for first time buyers trying to get on the property ladder.
An offset mortgage utilises other money like savings, or for people who have large amounts of money. They can work well for business owners who may hold funds for tax payments for example, where the held funds can offset interest. Essentially available funds sit in a bank account set against the mortgage until required, reducing the amount of interest payable while those funds are available. So for people with access to funds either periodically or permanently, this could be the best type of mortgage.
The mortgage market can be a minefield of complex offers, deals, and products, and often what’s available on the high street isn’t the full picture. So is it any wonder that it can be hard work to find the best type of mortgage for you? Professional advice from a mortgage broker (such as Liddle Perrett!), can help you to understand what is available in the mortgage market, and what the best fit could be for you and your family. Our team has the knowledge and understanding of all of the types of mortgage available in the market to help you make the best decision for you.
For advice and guidance on your residential mortgages drop a member of our team a line, and we can take a look at your personal circumstances and help you find the best mortgage and protection products to suit your needs.
Liddle Perrett Ltd is an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of First Complete Ltd which is authorised and regulated by the Financial Conduct Authority.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE