What mortgage is right for you?
The mortgage market is a complex, ever-changing and highly competitive world. The days of mortgages being provided by a relatively small number of lenders are long gone.
The modern lending landscape is as diverse in the number of providers there are as it is in the range of products from which to choose. That all adds up to a wealth of choice that may well mean there’s something for just about everyone, but can equally be confusing to those who’ve never applied for a mortgage before.
At Oportfolio, we’ll take the necessary time to properly understand you, your circumstances and your ambitions so we can recommend the products that are best suited to your specific and individual needs.
But in the meantime, this handy overview of the most popular types of mortgage currently on the market may prove useful in providing at least a rudimentary understanding of how each mortgage type works.
In very simple terms, there are two types of mortgage:
1. Fixed Rate Mortgage
If you have a Fixed Rate mortgage your monthly repayment will stay the same regardless of what happens to interest rates. The rate is fixed for a specific time – usually 2 or 5 years, but some lenders are now offering up to 10 years, after which the product moves to whatever the variable rate is at the time the fixed deal ends and your repayments are then subject to change at any time (unless you then choose to move to a new fixed rate product).
The advantage of a Fixed Rate mortgage is that you know exactly what you’ll be paying each month for the whole of the mortgage term. The disadvantages are that the fixed interest rate charged by the lender is usually a little higher than the standard variable interest rate (SVR) at the time the loan is made, lender charges are often applicable if you want to move your mortgage before the fixed period ends and if the SVR falls, you won’t benefit.
The picture becomes a bit more complicated when we start to talk about Variable Rate mortgages. The common factor in every Variable Rate mortgage is that your monthly repayment can change at any time. However, certain types of Variable Rate mortgages can offer a degree of certainty over the extent to which those changes will affect you.
2. Variable Rate Mortgage
Variable Rate mortgages include:
Standard Variable Rate mortgage: your monthly repayment is made at whatever the current standard interest rate charged by the lender is at that time. This is often affected by changes by the Bank of England to its base rate. The advantage of this type of loan is that you have the freedom to leave it at any time. The disadvantage, obviously, is that your repayments can change at any time.
Discount mortgage: this is where the lender offers a fixed-term discount on the SVR interest rate it charges. The advantages are that the loan starts off being cheaper and if the SVR falls, so will the discount rate, meaning your repayments will be cheaper. The disadvantages are that lenders can raise their SVR at any time, as can the Bank of England – and in both cases your discount rate (and, therefore, monthly payment) is also likely to rise.
Tracker mortgage: Tracker mortgages are similar to discount mortgages in the sense that they are set at an interest rate which is set at a fixed percentage point below another specific rate (usually the Bank of England base rate, plus a few percent). For example, your tracker rate might be set at 0.5% below the lead rate which, for argument’s sake, may be 0.75% at the time the loan is approved – so you will pay 0.25%. But this will move up or down in line with the lead rate, which can be an advantage or a disadvantage, depending on which way it moves. Tracker rates are often fixed for a short period – 2 to 5 years – but some lenders offer the rate for the lifetime of that mortgage.
Capped Rate mortgage: A capped rate mortgage moves in line with the SVR, but the lender places an upper cap beyond which your rate will never go. The advantages are that the rate will never move above a certain point (but you’ll need to be able to afford your repayments if it reaches the cap) and your monthly cost will go down if the SVR falls. However, the cap on these mortgages can be set relatively high and the rate itself can often be higher than other fixed and variable rate products that are available.
Offset mortgages: These are linked to your savings and current account. You will have a monthly payment as you would with any mortgage, but your savings or account balance acts as an overpayment to reduce the cost of the mortgage. These are worth considering if you have savings or routinely have a positive balance in your current account, but offer little benefit if you don’t.