Choosing the right type of mortgage is important. Picking one that doesn’t suit your income and expenditure can cost you lots of money in the long run and could even pose barriers to you moving house in the future. Here is a rundown of the most common types of mortgages with their pros and cons.
“Mortgage” literally translates in old French and Latin to mean ‘death pledge’. In less morbid terms, a mortgage is a type of loan that’s used to pay for a property. They provide a way for most of us to buy our homes without having all the money upfront. As most of us will not have £270,000 (the average house price in the UK), we will need to rely on a mortgage to provide the cash. When you are approved for a mortgage, your lender will give you an agreed amount of money to buy the home (probably 90-95% of the price of your home, depending on the size of the deposit you put down). You will then agree to pay back this loan, with interest (a charge, usually a percentage that you pay back to the lender, on top of the full loan amount, for the privilege of borrowing the money in the first place). The interest rate that you will pay back is dependent on the current market rate and how much of a risk the lender perceives you as when lending you the money. Whilst the market rate is out of your hands, having a good credit score and showing lenders that you can manage your money sensibly and make repayments on time will drive down your interest rate.
A fixed-rate mortgage is where the interest rate is guaranteed to stay the same for a set period. Therefore, your mortgage payments (loan + interest) will be fixed for this period and offer you certainty about repayment. This is beneficial if you’re on a tighter budget and need to know how much to repay each month, so you’re not met with any nasty surprises. Two and five-year fixed-rate mortgages are by far the most common, however, one, three, seven and ten-year ones are not unheard of. The longer-term your mortgage is fixed for, the higher the rate of interest is likely to be, as it is harder for lenders to predict market rate far into the future. This is somewhat of a gamble because the market rate could decrease as well as increase, so you may be locked into an ‘expensive’ mortgage for a long period.
A standard variable rate is a variable mortgage, i.e. one where the lender has total control over how much to charge you each month. They are a default option that most people are automatically transferred onto once a fixed-rate mortgage or tracker mortgage ends. They are typically the most expensive mortgage rates available and your payments will likely increase, rather than decrease, over time. However, there may be no early repayment charges, which may give you more flexibility to make overpayments, pay off the mortgage early or remortgage onto a new deal.
A tracker mortgage is so-called because their interest rate is ‘tracked’ or determined but the Bank of England’s base rate. They are a type of variable rate mortgage, so come with the same risks – specifically of the interest rate increasing and being stuck with an expensive mortgage. Also, when the introductory rate period ends you go onto another type of variable mortgage, usually a standard variable rate which are by all accounts, not the best deals. But, interests rates could also decrease, which would result in cheaper monthly payments for you. Introductory tracker rates can be among the lowest mortgage rates available, and arrangement fees for tracker mortgages tend to be lower than for fixed-rate mortgages and early repayment charges can be less expensive for tracker mortgages compared to fixed rates.
A first-time buyer mortgage is for people who are new to the housing market. There are schemes in place to try to offset some of the expenses to first-time buyers and allow more people to get on the property ladder. This includes not paying Stamp Duty on houses under £300,000, first time-buyer schemes and 5% deposit/95% mortgages.
Offset mortgages are available to people who have a saving account and mortgage with the same lender. They let you use your savings to offset the interest charged on your mortgage. The balance in your savings account is used to reduce the amount of interest charged on the mortgage. They can be a great way to save money and can help you reduce your monthly payments or shorten the term. However, your saving will not earn interest and will lose their spending power as they won’t grow.
A guarantor mortgage is a way of securing a mortgage without having the deposit, or if you have an unfavourable financial history that may discourage lenders from lending you the money. They can provide a way for first-time buyers to get on the property ladder. Whilst your guarantor will not own a share of the house, they will be legally responsible for making the mortgage repayments if the original borrower fails to make them. If you continue to miss repayments, your house could be repossessed, or the guarantor could lose their house or savings.
These are just some of the many types of mortgages available and each has pros and cons. At Ackroyd, we have a team of solicitors ready to help you manage the entire mortgage process, ensuring all legal and financial procedures are adhered to. Get in touch with us today.