When the time comes to purchase a property, the vast majority of us rely on a mortgage. It’s the biggest debt we’ll ever have to worry about, but the sheer size of the loan isn’t the only thing to worry about.
There are thousands of different mortgages available on the market today, and a host of different mortgage types. As a result, it’s important to do your research if you are going to find the right one to match your circumstances and attitude towards risk.
With a fixed rate mortgage, your interest rate is locked in for a certain period. So, for example if you have a two-year fixed rate deal at 3%, it means that your interest rate will not change in those two years, no matter how the Bank of England may adjust its central bank rate.
A fixed rate deal means borrowers know precisely how much their monthly payments will be each and every month for that fixed period. This security does come with a premium though, as fixed rates are generally more expensive than variable rate deals.
Fixed rate mortgages are available from relatively short periods like two or three years up to ten years. Usually, the longer you fix for, the higher the interest rate will be.
As the name suggests, the interest rate you pay with one of these deals ‘tracks’ against the base rate. This means that as the base rate moves, so too does the rate you pay on your home loan.
So for example let’s say you have a mortgage that comes with an interest rate of the base rate plus 2%. At the moment, with base rate at 0.75%, that would mean your interest rate is 2.75%. But if base rate goes up to 1% next month, your interest rate would go up to 3%.
As your interest rate changes, so does your monthly repayment. Your mortgage bills can go up and down at fairly short notice, and can increase dramatically if base rate jumps sharply. If you are willing to take a bit of a gamble, these are usually cheaper - initially at least - than fixed rates.
You can get a short-term tracker over two or three years, or a term tracker which tracks the base rate for the entire lifetime of the mortgage.
A discounted mortgage is a sort of tracker, though it doesn’t track against the base rate. Instead it tracks against your lender’s standard variable rate, a rate which the lender itself sets and which it can increase or cut at any time, irrespective of what’s happening with base rate.
As a result, a discounted mortgage can be even more unpredictable than a normal tracker mortgage.
An offset mortgage links your home loan with your savings account. You then only pay interest on the difference between the two sums.
For example, if you have a £150,000 mortgage and £20,000 in your savings account, then with an offset mortgage you would only pay interest on £130,000 of your mortgage balance.
This can be an effective way to reduce the size of your monthly mortgage repayments, though you sacrifice earning any interest on the savings in order to do it.
When you come to the end of your initial fixed, tracker or discount period on your mortgage, you’ll move onto your lender’s standard variable rate (SVR). This is a rate that the lender sets themselves and is generally much higher than the best rates on the market.
The lender can change the SVR however they like, at any time they like too. So even if the Bank of England has not increased or cut the central base rate, a lender can still hike the SVR - and with it your repayments - if they wish.
It’s because of how expensive the SVR is that it’s a good idea to remortgage when you come to the end of your initial fixed or variable period, so that you don’t end up seeing your monthly repayments rocket.
Guarantor mortgages are not as common as they once were, but can be a useful option for people looking to purchase their first property.
You need to secure a ‘guarantor’ who essentially agrees to guarantee your mortgage payments. In other words, if you don’t make your payments, the lender can pursue your guarantor for the money.
The plus point for a guarantor mortgage is that the lender doesn’t just consider the main applicant’s finances when deciding whether to approve the mortgage - they look at the guarantor’s finances too. This can mean the borrower can lend more than borrowing on their own.
First-time buyer mortgages
Many lenders design specific mortgages for people looking to purchase a property for the first time.
These tend to be available for borrowers who only have a small deposit, typically ranging from 5-15%. These may come with slightly higher interest rates than those on offer to home movers.
First-time buyer deals may be available across fixed or variable terms, depending on the lender.
Help to buy mortgages
The government’s help to buy scheme is designed to give first-time buyers a helping hand even if they only have a 5% deposit. The idea is that buyers get an equity loan worth 20% of the property’s value, which they don’t have to make repayments on for five years, to supplement the deposit.
As a result, buyers only need a mortgage for 75% of the property’s value. However, be aware that you’ll need to use a lender that offers a specific help to buy mortgage - you can’t just find a 75% LTV deal from any lender.
These deals will be available on both fixed or variable rates.
Another scheme that can prove useful for first-time buyers is shared ownership. This is where you buy a portion of a property, and then pay rent on the portion that you don’t own.
You may share ownership with a local authority or developer, for example.
Again, you’ll need a specific shared ownership mortgage in order to purchase a property in this way. They aren’t offered by every lender around, so your choice will be more limited.
Repayment vs interest-only mortgage
You also have options when it comes to repaying that mortgage.
With a repayment mortgage, your monthly repayment is essentially made up of two parts. A portion of the money you pay is going towards repaying the actual sum you borrowed in the first place, with the rest going on the interest charges.
This means that when you get to the end of the mortgage term, the entire loan will be paid off.
With an interest-only mortgage, your repayments are only covering the interest charges on your debt. This will be cheaper, but it means that when you come to the end of the mortgage term you’ll need to repay the capital you initially borrowed in order to purchase the property.
That may mean selling the house and moving somewhere else.