What kind of mortgage should you get?
When it comes to buying a home, you need to figure out how you will finance it. One way of managing finances is to get a mortgage. However, you are likely to get confused when you hear the numerous types of mortgages that are available in the market.
You must pick the right mortgage depending on your circumstances. If you get the wrong one, it could cost you more than you can afford. This article will help you narrow down which type of mortgage is right for you.
What are the various kinds of mortgages?
- Interest-only or repayment mortgages
In a repayment mortgage, you repay the interest and the equity of the house each month in instalments. On the other hand, in an interest-only mortgage, you will first pay off the interest and then pay off the equity at the end of the term.
- Fixed-rate mortgages
In a fixed-rate mortgage, the rates will be fixed for a predetermined number of years. After the end of that period, they will revert to the lender’s standard variable rate. It is a good option for people who are on a tight budget.
You do not have to worry about increasing interest rates by the Bank of England during your fixed-rate period. They are easier to budget and remove uncertainty.
However, you could get trapped in a higher rate mortgage and end up paying more than you would as compared to a variable rate mortgage. Further, if any of the base rates fall, you will not be able to take advantage of it.
How long should you fix your mortgage for?
If you want to go with a fixed-rate mortgage, you will have to decide it’s the term (i.e. 2 years, 3 years, or 5 years). A longer fixed-rate mortgage will give you greater certainty and will appeal to you if you are financially stable, but your circumstances are a bit stretched and want to keep your financial risk to a minimum. However, a lot can happen in 5 years, and you may feel trapped later on.
On the contrary, you will have left behind the enormous expenses involved in moving to a new home within 2 or 3 years. After that, you will have a greater capacity to cope with changing interest rates. For this reason, you may want to go for a 2 or 3 year term.
- Tracker mortgages
Tracker mortgages are subject to changes in the interest rates if there is any increase or decrease in the base rate by the Bank of England. A tracker mortgage can be for the entire length of the mortgage or a specified period.
Tracker mortgages are the most transparent. Further, your repayments will fall if there is a decrease in the interest rates. Additionally, they often provide the best value.
However, this is a double-edged sword as your repayment will go up if the interest rates go up as well. Due to this reason, tracker mortgages are unpredictable.
- Standard variable rate mortgage
In a standard variable rate mortgage, your mortgage repayments could change each month depending on whether the interest rates increase or decrease.
It would be best if you entirely avoid getting a standard variable rate mortgage and you have already gotten one then remortgage.
- Discounted mortgage
Discounted mortgages are offered to attract people to the lender’s more expensive standard variable rate mortgage by decreasing their rates for an introductory period. After the end of the discounted period, the rates will revert to the lender’s standard variable rates.
A discounted mortgage is good options for you in you need help in climbing the property ladder. It is also possible to find a discounted tracker mortgage.
You should be careful about what will happen when the discounted period ends. You need to anticipate how much your monthly repayments will increase by the end of the discounted period.
- Offset mortgage
In offset mortgages, your lender will consider the saving you have in a bank account and knocks that amount off from the debt on which the lender will charge interest.
An offset mortgage will help you reduce the amount of interest you will be paying, and it will also give you the flexibility to pay off the mortgage earlier.
However, you will not get any interest on the savings you have. Further, interest rates on offset mortgages tend to be slightly higher.
- First-time buyer mortgage
First-time buyer mortgages are specifically designed for first-time buyers to help people climb up the property ladder. They have a lower deposit requirement and lower application fee. First-time buyer mortgages are also often discounted for an introductory period.
With first-time buyer mortgages, you can lower your interest repayments. Further, they are also more flexible as compared to other mortgages.
However, there is no guarantee that it will be the best deal you will get.
- Guarantor mortgage
By getting a guarantor mortgage, if you have a relative who is willing to act as a guarantor and agrees to make repay the mortgage if you cannot, you can borrow a more considerable sum as compared to other mortgages.
Should you go for annual calculation or daily calculation of interest?
It is of utmost importance that you understand the various ways in which the mortgage lender will calculate the interest on the mortgage. An unfair lender may try to add to your cost of a mortgage by relying on your confusion regarding the calculation of interest rates.
It would be best if you went for daily calculation and altogether avoid getting a mortgage with an annual calculation as you risk being charges on interest even on debts which you have cleared. It is not illegal for the lender to do so if he calculates the interest annually. Therefore, it is best to avoid annual calculation mortgages.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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