Buying a house to call their own is a dream for most families. However, as the time to purchase your home comes closer, you may feel a wave of anxiety engulfing you. After all, it is a significant financial decision and, in all probability, the costliest purchase of your lifetime.
When you are banking on a mortgage to make your dream come true, the situation may get a little tricky. With so many options, it’s challenging to understand which one is more suitable for your needs. A wrong step can cost you thousands of pounds in the long-term.
Don’t worry if you are having a tough time comparing the mortgage deals. Here is a round-up of some popular loans – along with their pros and cons – to help you make an informed decision.
What Are The Different Types Of Mortgages?
When you know the options available in the market, you can ask the right questions when shopping around for a mortgage. Similarly, if you want to renovate your existing house, you can compare home improvement loans & find the best rates.
1. Repayment And Interest-Only Mortgages
In a repayment mortgage, your monthly installments contain part interest and part equity. It ensures that your mortgage will be paid off by the end of the term.
On the other hand, interest-only mortgages allow you to repay the interest first and then the principal. There will be a fixed period by when you have to repay your interest. You will be required to repay the principal either in full or by a specified date.
When you take an interest-only mortgage, you can also get the advantage of interest-only payments for a specified time. It will allow you to arrange for higher installments that will begin later.
Most homebuyers prefer repayment mortgages as it ensures that both the interest and the principal are being paid off. More importantly, it guarantees that you are mortgage-free by the end of the term.
2. Fixed-Rate Mortgage
The interest rates on mortgages are not fixed in the market. They depend on multiple factors such as the economic growth in the country, demand from the buyers, inflation and employment rate.
When you opt for a fixed-rate mortgage, the lender fixes your interest rate for a predetermined number of years. After this time, the standard variable rate becomes applicable to your outstanding amount.
Fixed-rate mortgages are popular with homebuyers because it gives clarity about the loan instalments. You won’t get any surprises if the banks increase their rates. As a result, you won’t have to make any changes to your monthly budget.
On the flip side, you won’t benefit if the interest rate falls. Moreover, you won’t be able to remortgage or repay your outstanding amount before the tenure. Fixed-rate mortgages require you to pay early redemption fees in such cases.
3. Tracker Mortgage
Here is a mortgage that is fixed at a certain percentage on the ongoing Bank of England’s base rate. For instance, it may be pegged at 1.5% above the Bank of England’s base rate. Thus, every time the base rate will change, you can expect a change in your installments.
The best part is that every time the base rate will fall, your interest rate will reduce accordingly. A lot of times, the lenders do not pass this benefit to the customers. Tracker mortgages are transparent and always follow the base rate.
When you choose a tracker mortgage, you may get this benefit for a fixed number of years. After that period, the lender’s standard variable interest rate will become applicable to your mortgage.
4. Discount Mortgage
Lenders have a standard variable rate that depends upon the base rate of the Bank of England and their own costs. A discounted mortgage gives you this benefit for a set number of years or the entire term.
For instance, the discount mortgage could be pegged at 1% below the standard variable rate, which is 3.5% currently. Thus, your discount mortgage rate will be 2.5%. Most lenders have a collar, which means they set the lowest your discount mortgage can go to.
The flip side is that lenders have a free hand in changing their standard variable rate. They can increase it anytime, resulting in higher monthly payments. Thus, it is crucial to understand what will happen once your discounted period gets over.
5. Standard Variable Rate Mortgage
All lenders have SVR, and they switch you on to them once your discount or tracker mortgage ends. Lenders have a free hand at choosing this rate and can change the rate anytime.
When your lender moves to the SVR after your initial discounted or tracker rate has ended, there will be a lot of uncertainty.
Firstly, since this rate is high, your monthly outgo will increase. Secondly, as the banks can change this rate anytime, your instalment can go up anytime without any warning.
Which Mortgage Should You Choose?
If you wish to learn about picking the right mortgage for your needs, follow these handy tips.
Review The Total Cost
Without a doubt, you would want to opt for a mortgage that would give you the maximum benefit and flexibility. It is advisable to use the online calculator to understand your monthly liability. Take a long-term view to get clarity on the total interest that you will be paying.
Look For Hidden Fees
Hidden charges by lenders tend to inflate your overall liability. It may pinch you when you haven’t accounted for it. Ask the lender upfront about such fees to reduce overdraft costs and other charges.
Pick A Shorter Fixed-Term
If you plan to move houses or clear your mortgage sooner than later, it is advisable to choose a short term for your fixed-rate mortgage. It will save you from the early repayment charges, which can be as high as 10% per year.
Check With Multiple Lenders
Do not settle with the first offer you get. Approach multiple lenders and compare what they are offering. You might be in for a much better deal this way.
Taking a mortgage is one of the most crucial financial decisions of your lifetime. With this information on hand, you can make a well-informed choice in line with your needs.