When you’re thinking about buying a house you need to spend a lot of time considering whether or not it’s the right decision for you. Among the details you must consider is a mortgage. There are a number of different types of mortgages from a wide variety of lenders. So, whether you’re a first-time buyer or have owned homes before, we have some useful and interesting information on one of the most important financial decisions you’re likely to make.
Just so you’re clear on what you’re getting into, a mortgage is a loan – usually from a bank or building society – that you take out to buy a house. Because the cost of buying a home is typically in the hundreds of thousands of pounds, it’s a large loan which can be taken out over periods up to 30 years and sometimes longer.
The mortgage loan is secured with a deposit and by the property. That means if you default on the mortgage, the lender then becomes the legal owner of the property and can sell it to recoup the initial mortgage loan they made on it.
There are two main types of mortgages:
- Interest Only
A repayment mortgage is where your monthly repayments include the interest payment to the lender for the loan and part of the loan amount too. At the end of your agreed mortgage term you will have repaid the entire mortgage loan and associated interest payments and own the home 100%.
An interest only mortgage is where you only repay the interest on the mortgage loan to the lender. At the end of the agreed mortgage term you will need to use additional monies – perhaps from an investment scheme or savings account – to repay the initial mortgage amount before you become the owner.
Repayment mortgages tend to be more popular, both with home-buyers and lenders, as it means you will (in theory) eventually own your own home.
Important details for first-time buyers
While this will probably be the biggest purchase you have made in your life so far and you’re expecting to spend a good chunk of your monthly earnings on it, it’s important not to stretch yourself too much.
First of all, you need to make sure you have enough money each month for bills and insurances. You’ll also want to have enough money to put some savings aside each month in case something goes wrong, or to allow you to make improvements to your new home in the future. Finally, you want to be able to enjoy yourself too, go out and treat yourself from time-to-time.
That can be quite a lot to achieve from a monthly income! So, take the time to crunch your numbers carefully.
In additional to your affordability – something that will be questioned and tested by your lender too – is getting the best deal you can. At the time of writing, UK interest rates are at a record low of 0.25% which means the cost of borrowing is lower than ever before. Interest rates can and will change, however, but it’s always worth taking a good look at what’s on offer before investigating further and committing yourself to a mortgage.
Mortgage brokers and advisers are experts in the field and even if you aren’t too keen on the idea of discussing your personal finances with a stranger, it could well be worth having even one meeting to give you more of an idea of exactly what’s available to you and what type of monthly repayments you can expect to secure.
Diverse range of mortgage products
Beyond the basic repayment and interest only mortgages, there is a wide range of mortgage products available. They include:
- Fixed rate
- Standard variable rate
- Offset mortgages
- Base rate tracker
There are other specialist mortgages available too, but these four are the ones typically in use by many home-buyers and available from most lenders.
A fixed rate mortgage ties you in to a single rate for a certain period. That period can vary from two to 30 years. Popularity of which time period tends to depend on the outlook for UK interest rates. If the Bank of England (BOE) is expected or has indicated it intends to raise rates in the next year or so, then you might want to tie our self into a 5-year deal. Although it probably won’t be as low as the two- or three-year mortgages that area available, it will guarantee you a set rate for five years that won’t be affected by any central bank rate hikes during that period.
When interest rates are expected to be cut by the central bank, then base rate trackers are a good idea. The interest rate associated with those mortgages will fall when the BOE’s interest rate does, which will reduce your monthly mortgage repayments.
A standard variable rate, meanwhile, is the lenders basic, default rate and tends to be influenced by both the central bank’s interest rate and financial market expectations. It’s typically higher than fixed rate deals, however, if your credit score is less than perfect, it may be easier for you to secure an SVR than a fixed-rate mortgage.
An offset mortgage, meanwhile, links your mortgage to your current account and savings and allows you to move your interest rates around. For example, if you have a good level of savings you can either opt to keep the earnings from the savings interest rate in your savings account, or you can have that amount deducted from your mortgage. It might not seem like a lot, but, if you do this for a number of years then it can make a difference.
It’s your decision
While it can be sensible to take advice, in the end, you need to choose a mortgage type and amount that you’re going to 100% comfortable with.
If you prefer the security of knowing what your mortgage payment will be each month then a fixed-rate dealt might be best for you, even if there are cheaper deals available at the time you take out your mortgage. If you’re fine with potential changes to your monthly repayments, then going for a tracker and potentially variable rate could be for you. Or, if you are a sensible saver and a good offset mortgage account is available, that could make the most financial sense.
While it might seem complicated at first, once you see more details and example repayment schedules and changes, it will become clearer and make your decision easier.
If you feel you need more information or help, have any concerns about choosing a mortgage, questions or aren’t sure you’re making the right decisions then why not visit the Mortgage Advice Bureau? Their website has lots of useful sections, including a mortgage calculator and information on the best mortgage deals at a given time.