With so many different mortgage deals to choose from, finding the right one for your individual circumstances can feel a bit like hunting for a needle in a haystack.
All mortgage types work in the same basic way: you borrow money to buy a property over a set term and pay interest on what you owe.
How much you pay back each month is determined not only by how much you’ve borrowed, and the rate of interest you’re paying, but also how long your mortgage term is, and whether you’ve opted for an interest-only or repayment mortgage.
The money you borrow is called the capital and the lender then charges you interest on it till it is repaid.
Repayment vs Interest Only
A ‘repayment’ mortgage is where you pay off the loan in monthly increments made up of both interest and an amount of the capital until there is nothing left - when the term ends you will not owe any more money!
An ‘interest only’ mortgage is where your monthly payment is only paying off the interest and when the term finishes you will still owe the original amount you borrowed. Most lenders would still want to know how you intend to repay at the end of the term, and would request to see evidence of a savings plan, investment or asset.
Once you’ve decided how to pay back the capital and interest, you need to think about the mortgage rate type.
Mortgages come with fixed or variable interest rates.
Fixed rate mortgages
The interest rate you pay will stay the same throughout the length of the deal no matter what happens to interest rates.
You’ll see them advertised as ‘two-year fix’ or ‘five-year fix’, for example, along with the interest rate charged for that period.
You have peace of mind that your monthly payments will stay the same, helping you to budget but if interest rates fall, you won’t benefit
You are tied in for the length of the fixed rate, and would need to pay charges if you want to leave the deal early, or make overpayments larger than the deal’s allowable amount
At the end of the fixed period, you should look for a new mortgage deal two to three months before it ends or you’ll be moved automatically onto your lender’s standard variable rate which is usually higher.
Variable rate mortgages
With variable rate mortgages, the interest rate can change at any time.
Make sure you have some savings set aside so that you can afford an increase in your payments if rates do rise.
Variable rate mortgages come in various forms:
Standard variable rate (SVR) - This is the normal interest rate your mortgage lender charges homebuyers and it will last as long as your mortgage or until you take out another mortgage deal.
Changes in the interest rate might occur after a rise or fall in the base rate set by the Bank of England. You can overpay unlimited amounts leave this type of deal at any time
Discount mortgages - This is a discount off the lender’s standard variable rate (SVR) and only applies for a certain length of time, typically two or three years.
If the lender cuts its SVR, you’ll pay less each month, but the opposite is also true – if the SVR increases as will your payment. As with the fixed rate, you are tied in for the period of the deal, and would need to pay charges to leave early.
Tracker mortgages - Tracker mortgages move directly in line with the Bank of England’s base rate. So if the base rate goes up by 0.5%, your rate will go up by the same amount.
Usually they have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage or until you switch to another deal.
If the BoE vase rate falls, so will your payments, but again, as will all variables, if it increases your payments will too. And as this is a “deal” then you’ll also be tied in.
Offset mortgages - These work by linking your savings and current account to your mortgage so that you only pay interest on the difference.
You still repay your mortgage every month as usual, but your savings act as an overpayment which helps to clear your mortgage early. These are particularly helpful for those who have savings they don’t want to use, or that save up large sums in the year for things like tax bills.
Whether you are a first-time buyer, or a homeowner looking to buy another property or remortgage, Willow Tree Financial Services is here to help!
With our friendly staff we ensure we provided a stress-free service with your best interests in mind. If you would like to learn more or progress with an application, please contact us on 01323 436680.
Your home may be repossessed if you do not keep up repayments on your mortgage.
