When you find a new home that you want, you’ll be feeling relief that the chasing and choosing is over. But the hunting may not be quite over yet – you still need to track down the mortgage that is right for you.
Fortunately, at Continuum we can help – and we can start with this handy introduction to choosing the most appropriate mortgage product for you.
How do mortgages work?
There are hundreds of mortgages on the market, but all work in the same basic way. You borrow money to buy a property, pay interest on the loan and eventually pay it back. Things get more complicated when you start looking at the details. Not only are there different interest rates, there are different ways to repay – and special mortgages for special situations.
You may need help to decide which options are right for you.
Repayment or interest only?
All mortgages charge interest– the money you pay to borrow the money you need. With a repayment mortgage you pay interest each month, plus some of the capital you’ve borrowed. At the end of the agreed term, which can be 25 years or even longer, providing you make all your payments on time you’ll have paid back everything and own your home outright.
With interest-only mortgages, you pay just the interest each month. At the end of the term you’ll have to find enough money to repay the whole debt. Lenders will require you to prove you have a credible repayment strategy at the outset. You can save or invest to build up the cash or even use an inheritance – but you must be confident of having the money when the time comes. If you don’t, you might have to sell the house to pay off the mortgage.
Fixed rate or variable?
Any mortgage is a long-term commitment, and you will want to be sure that you can afford the repayments – which can vary along with base rates over the years.
For this reason fixed rate mortgages are popular, because they mean your mortgage rate is fixed for a set number of years – often 2, 3 or 5 years but potentially as many as 10. You know exactly how much you’ll be paying each month, regardless of what happens to interest rates on other mortgages.
But you’ll need to be careful. You’ll be stuck on a higher rate if mortgage rates go down, and there will be an early repayment charge if you switch before the end of the incentive period. In some instances there may be a liability to a charge after the incentive period this known as an ‘overhang’. You should check the product to clarify the timescale that any charge could be applied. When the fixed rate comes to an end, you’ll be put on the lender’s standard variable rate (SVR) which may be higher and will go up and down depending on Bank of England base rate and some other factors. They may also offer other variable rate deals – which can be a good idea if interest rates fall.
Tracker mortgages are a type of variable rate that move in line with the Bank of England base rate, with a set interest rate above it. So, with base rate at 0.75% and an add-on rate of 1.5%, your mortgage rate will be 2.25%. When base rate changes, your mortgage rate will go up or down by the same amount.
Discount rate mortgages are another type of variable mortgage, which offer a discount on the lenders SVR. They can often offer the lowest rates available, but if the lenders increase their SVR the payments you make will increase, usually the discount will last for a period typically 2 to 5 years.
If you are worried about rates going up too far you can have a capped rate mortgage, which means your repayments will never exceed a certain level while you can still benefit when rates go down.
Cashback, offset and flexible mortgages
Cashback mortgages are a marketing incentive sometimes offered by lenders. When you take out their mortgage, they give you back a percentage of the loan. This sounds like a good idea – but you will probably be paying a higher interest rate to pay for the money they ‘give’ you.
Offset mortgages could potentially be a better idea. They link your mortgage to a savings account, and each month, the lender deducts the amount you have in savings (and the interest they would have earned) from what you owe on the mortgage and you pay mortgage interest just on the difference between the two. For example, if you have a mortgage of £100,000 and £10,000 savings your mortgage interest is calculated on £90,000 for that month. You can still access your savings, but the more you offset, the less you’ll pay for your mortgage.
This can be a good idea if you have a large reserve of savings and are a higher rate taxpayer.
Flexible mortgages let you repay when you can afford it and less if you hit a difficult patch, providing this is within the lenders terms and conditions. The mortgage rate will end tend to be higher than on other deals, but it can help if your income varies.
What is right for you?
There are many mortgage choices – including special deals for first time buyers, those with small deposits and those buying for investment. Even when you have decided on the type of mortgage that’s most appropriate, there are many lenders and many rates to choose from – and the lowest rate might not always be the best deal.
The best choice of all is to get an expert working with you.
Using expertise and state-of-the-art technology your Continuum adviser can help you choose the mortgage that is right for your needs, make sure you have the right protection in place, and guide you through the whole process.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
Keep in mind, though, that your capital repayments are still based on the full loan amount – the offset arrangement reduces the amount that you need to pay interest on, but not the loan itself, which will still need to be repaid in full.
Offset mortgages can also come with slightly higher interest rates than ordinary repayment mortgages, which might undo some of the benefits of offsetting. If you have a relatively small amount of savings, you might save more money by searching instead for the lowest-rate mortgage deal available to you.