Choosing The Right Mortgage Type
Choosing the right mortgage is an important part of your house buying process. Lenders offer many different types of mortgages, and you will benefit from understanding how each one works before making your final choice.
There are two basic types of mortgages: interest-only mortgages and repayment mortgages. There are several variations of mortgages within the repayment mortgage category. First, decide if an interest-only mortgage or repayment mortgage fits your needs. If a repayment mortgage seems to suit your better, then decide which of the repayment mortgage varieties appeals to you the most. Ask your lender to explain all the mortgages available to you.
Your monthly mortgage payments for interest-only mortgages cover only the interest on the loan. When your mortgage term comes to an end, you will still owe the entire amount of the original mortgage loan. If you decide to secure an interest-only mortgage, make sure you plan ahead in order to be able to pay the total mortgage loan at the end of the mortgage term. If you have no means to make this payment, the lender may repossess your house. An interest-only mortgage can prove to be a risky proposition for many borrowers, so be extra cautious if you decide to take out this type of mortgage loan. Borrowers with interest-only mortgages may be expecting an inheritance, plan to use money from a pension plan, or set up a tax-free investment savings account known as an ISA, or individual savings account. Keep in mind that these plans are not always 100% guaranteed.
A repayment mortgage monthly payment includes both an interest payment and a capital payment, meaning that part of the payment is applied to the original mortgage loan amount. If you are consistent with your mortgage payments, by the end of the mortgage term you will have completely repaid the mortgage loan and will own your home. Repayment mortgage monthly payments are significantly higher than interest-only mortgage payments, but the borrower will have the security of knowing that the house will be paid for at the end of the mortgage term.
There are several popular repayment mortgages available. One of the most preferred types is a fixed rate mortgage. One of the advantages of a fixed rate mortgage is that you know exactly what your mortgage payment will be every month. This is quite handy for determining a household budget. The fixed interest rate is set for a predetermined number of years, typically between one and five years, but possibly up to twenty-five years. Once this time period is up, the loan interest rate will change to the lender’s current standard variable rate, or SVR. The fact that a fixed rate mortgage applies the same interest rate for the mortgage term can be either an advantage or disadvantage to you. If interest rates increase during your mortgage term, you could very likely end up paying a lower interest rate than borrowers with a variable rate mortgage; however, if interest rates decrease during your mortgage term, the opposite would be true. Fixed interest rate mortgages do offer some security, but there is also the possibility that you will be dissatisfied with your interest rate if your lender’s SVR declines. If you opt to end your fixed rate mortgage early in order to take advantage of a better mortgage deal, you will be charged a hefty early redemption penalty.
Discounted variable rate mortgages are another type of repayment mortgage. With this type of mortgage, your initial mortgage interest rate will be lower than the lender’s standard variable rate and will be adjusted according to the constant rise and fall of interest rates. Discounted variable rate mortgages are appealing to most borrowers, and lenders charge higher upfront mortgage fees for the privilege of securing one of these loans. There is a chance that interest rates will fall during the term of your mortgage, resulting in a lower monthly payment. There is also a chance that interest rates will rise during your mortgage term, and this will mean a higher monthly mortgage payment. Consider whether an increased monthly mortgage payment would put a burden on you financially. If you feel comfortable taking this gamble, then a discounted variable rate mortgage might be right for you. If, however, you hesitate at all, it would probably be wise to choose another type of mortgage. Significant early redemption penalty fees are also applied to discounted variable rate mortgages.
Capped rate mortgages combine characteristics of both the fixed rate mortgage and the discounted variable rate mortgage. This type of mortgage has a set “cap,” or limit to the amount of interest that can be charged. If the lender’s SVR increases during the capped rate mortgage term, the mortgage loan interest also increases, resulting in a higher monthly mortgage payment. If the lender’s SVR decreases, the mortgage loan interest will also decrease which will, in turn, lower the monthly mortgage payment. Capped rate mortgage interest rates will be adjusted by the lender quicker for rising interest rates. Some lenders will only adjust capped rate mortgages once a year for decreasing interest rates. Capped rate mortgages are one of the more preferred types of mortgages, and you will be charged premium fees if you are able to secure one of these loans.
A fix-and-track mortgage begins the mortgage term with a fixed interest rate, set by the lender. The fixed interest rate will be applied for a predetermined amount of time. After the fixed interest rate term ends, the mortgage converts to a tracker loan. Interest rates for tracker mortgages depend on the base lending rate set by the Bank of England. Tracker mortgage interest rates follow the rise and fall of the base lending rate, and they will be set at a certain percentage about the base lending rate. If the outlook for interest rates is that they will level off or even decline, a fix-and-track mortgage may prove to be a good deal. You can expect to be required to pay a larger deposit for a fix-and-track mortgage. The early redemption penalty for this type of mortgage will also be steep.
