An Overview of Different Mortgage Types
By Charles Owen-Jackson
First-time homebuyers often find themselves baffled by the large range of mortgage offerings available. Not only will you need to consider interest rates and any additional fees – there are also different types of mortgages available. Choosing the right option requires extensive research, since you’ll be committed to paying off the loan for many years, unless you sell the house and decide to pay it off earlier. The following takes a look at the various different mortgage packages available:
With a fixed-rate mortgage, the interest rate remains the same throughout the term of the contract. As such, it often makes more sense to go for this option when interest rates are particularly low, as they have been for recent years. However, if interest rates continue to fall, you will not be able to take advantage of the lower rates, and your monthly bill will always remain the same. Fixed mortgages typically turn into variable-rate mortgages after two to ten years.
Also known as tracker mortgages, committing yourself to variable interest rates is inherently riskier, since your monthly payments can change at any time. On one hand, a variable rate allows you to take advantage of decreasing interest rates, but should interest rates suddenly increase, you’ll need to make sure you have the funds available to continue paying. The main advantage of the variable-rate model is that it allows you to overpay or remortgage your property at any time.
Discount mortgages also offer variable interest rates. However, unlike standard tracker mortgages, where the interest rate is determined by the Bank of England base rate, rates are defined solely by the lender. While initial rates might be lower than they are with other options, pricing is neither as consistent nor as transparent in the longer term. You may find the monthly mortgage payments increasing when you least expect it. Discount mortgages typically come with terms lasting up to five years.
One of the more complex mortgage types, an offset mortgage is partially secured against any savings you have. The interest earned by these savings instead goes towards paying off the mortgage, although the debt will be calculated as the total value of the mortgage. Offset mortgages can be ideal for those with large savings, since it allows you to save thousands of pounds in interest payments as well as take advantage of various tax benefits. However, interest rates also tend to be higher.
Capped mortgages are another variable-rate payment plan whereby interest rates can fluctuate resulting in your bills rising and falling based on the lender’s standard variable rate (SVR). However, unlike standard variable-rate mortgages, your interest rates will be capped, meaning that they won’t increase above a certain level. Although starting rates tend to be somewhat higher than they are with other plans, capped mortgages do provide a degree of certainty while also allowing you to take advantage of low interest rate fluctuations.
For those seeking to purchase an investment property for renting out to tenants, a buy-to-let mortgage presents the obvious choice. In these cases, lenders calculate the amount they’re willing to lend based on the rental value of the property offset by any annual fees such as insurance or buildings maintenance. Though not as popular as they used to be, buy-to-let mortgages present a range of tax benefits for investors, and no National Insurance contributions are levied
Interest-only mortgages present the cheapest way to buy a property, making them particularly popular for both first-time buyers and investors. With these mortgage plans, you’ll spend the interest-only period paying only the interest, but the debt itself will not be paid off. The interest-only term typically lasts one to five years. However, this type of payment plan presents a significant risk, since you won’t be paying off any capital, but it can make sense for those on low incomes whose jobs cannot support normal monthly mortgage payments.
100 Percent Mortgages
Generally, when you purchase a property, you’ll be expected to pay a deposit of around 10 to 20 percent of its value before a lender will give you the rest of the money. However, 100% and 95% mortgages do exist for first-time buyers who do not have enough money saved up for a down payment. However, if house prices fall, you could end up owing the bank more money than the property is worth, making it extremely difficult to refinance the property or pay off the debt if you decide to sell.
Shopping around for a mortgage is undoubtedly an arduous and time-consuming task, but you’ll need to thoroughly consider all of the options before making this major financial commitment. For additional peace of mind, you may want to consider hiring the services of a professional mortgage broker who will shop around for the best deal on your behalf.