The dream about your own house with beautiful and cosy rooms, full of light and modern furniture, and a garden outside, where you can rest and meet your friends leads lots of people to the decision of a mortgage. For lots of people, it’s the only way they can buy a house at the moment they need it, not when they retire and finally save up a decent amount to buy a house for cash. Choosing the perfect house is one challenging part, with another one being the choice of the mortgage that meets your requirements. What are the mortgage types to choose from, and which is the best one for your financial situation?
The questions to ask at the beginning
Before choosing the best type of mortgage, suitable for your requirements and financial situation, there are a few issues you need to ananlyse.
The first thing to consider is the form of interest rates, and the form of them – should the rate be fixed, or variable? Another question to answer is the length of the mortgage deal – is it better for you to apply for a long-term repayment option with lower interest rates, or shorter time with higher installments? And what a loan-to-value rate is acceptable for you?
The answers to these questions will help you decide what type of mortgage will suit your budget and your plans. Looking for mortgage advice from professionals is also advisable at the beginning of the process of shopping for a mortgage, as the expertise of the financial advisor will give you a comprehensive outlook of the mortgage environment.
Should I take a fixed-rate mortgage?
The first type of mortgage has fixed rates, which means you will pay a set rate of interest throughout the term of your mortgage. It’s a safe option, especially in a time of financial crisis, when interest rates are constantly growing.
In the opposite situation, when the mortgage rates decrease, a fixed rate won’t decrease. Usually, you pay a fixed rate for two or five years, and then you switch to a variable rate unless you make a new deal that prolongs the initial rates. You can set the term of the mortgage for up to 40 years, which will allow for a lower monthly rate, but will block a set amount of money for the following 40 years.
The fixed-rate helps you a lot with your home budgeting, but in some months, you will pay more for your rate than you would pay for a variable one.
Before choosing the fixed rate, think about how long you are going to stay in the house. If you want to sell it after four years, and your term is 5 years long, you may be charged a lot for the early repayment.
Is a tracker mortgage better for me?
Apart from a fixed-rate mortgage, it’s worth knowing about a tracker mortgage, which is related to a variable rate based on the Bank of England’s rate, increased by a percentage on top. The monthly installment will depend on the base rate, increasing or decreasing. That’s the biggest disadvantage of this type of mortgage, as there will be months of really low rates, and others with a rate significantly growing.
What about a standard variable rate?
This option is quite expensive, with the lender’s default rate. When your fixed or variable deal ends, you automatically switch to this option, unless you switch the products or the lender.
The rate depends solely on the lender’s decision, which means you are usually charged more than in the other two options. It’s quite positive though you can leave any time you want without exit fees.
When is a discounted mortgage beneficial?
A discounted mortgage is a bit similar to the standard variable rate, with a set percentage for a period, which is usually two or three years. The rate is calculated by taking a discount from your lender’s SVR.
One of the greatest benefits though is the fact the rate may get low, and there are no early repayment fees. The riskiest part connected with this type of mortgage is the fact the rate depends merely on the lender’s decision, which equals a lack of certainty and the possibility to plan your budget precisely.
An interest-only mortgage – cheap but risky
An interest-only mortgage is seemingly one of the cheapest options for a mortgage, but with a trick. It is required to pay the interest each month only, but without repaying the loan itself, which means when the deal finishes, you will have to pay the debt off. It’s a good option for people who lack a big amount of cash at the moment they apply for the mortgage, and will be able to collect the whole amount. As the rates are quite low, you may save the amount to pay off the debt or sell the property.