If you’re a first-time buyer, it can be difficult to know what type of mortgage to choose.
If you’ve got no previous experience of mortgages, all of the technical jargon can leave you feeling a bit confused.
Don’t worry – we’ll take you through the different types of mortgage that are available, from fixed-rate to variable and all of the variations. This should help you to make a decision about the type of mortgage that’s right for you so that when you come to apply, you’ll know what you’re looking for.
A fixed-rate mortgage means that you’ll pay the same amount every month for the length of the fix – whether that’s a two-year fix, a five-year fix or even a 10-year fix. This means that if your lender increases (or cuts) its interest rates, you won’t be affected – you’ll keep paying the same amount as when your fix started. Fixes do end – they don’t last the whole of your mortgage – so if you want your mortgage to stay fixed, you’ll have to look for a new deal at the end of your original fix.
However, interest rates can go down as well as up and you might find that if you fix, you could have got a cheaper rate if you’d waited. Fixed-rate mortgages aren’t necessarily about getting the cheapest rate possible – they’re about the security that you’ll have by knowing your payments will be the same from month to month. If you like to stick to a solid budget every month and you’re not comfortable with risk, a fixed-rate mortgage will probably be suitable for you.
Mortgages on a variable rate can go up or down, so you might not pay the same amount from one month to the next. This can make it tricky to budget, as the rate can change at any time. However, they are often cheaper than the fixed rate products that are available so in return for less certainty you get a cheaper payment.
- Most variable rate mortgages will offer you an initial discount. The lender will usually quote you an initial variable rate, then the rate that it will revert to after the discounted period. Like fixed rate mortgages you can usually find discounts for one, two, three or even five years.
- Variable rate mortgages may be tracker products which means that they will stay a set amount above (or below) the Bank of England’s base rate (currently 0.5%). For example the rate may be 1% over the base rate – so currently 1.5% would be the rate you pay. The tracking period may be for the life or the mortgage or for a set period.
- If the mortgage isn’t a tracker it may be linked to the lender’s Standard Variable Rate. This is their “ordinary” mortgage rate that they move borrowers onto after their promotional rate ends. It is usually quite a bit higher than the Bank of England’s base rate and is rarely the cheapest rate so when you’re moved onto this, it might be a good time to think about remortgaging.
- A capped rate mortgage can offer a “best of both worlds” mix of product features. Like a fixed rate mortgage the rate will be guaranteed not to rise above a set level for a period. However, if interest rates fall then the mortgage rate you pay will fall too. Capped rate products are less attractive at the moment as most experts don’t expect interest rates to fall from their current historically low levels.
- Offset or flexible mortgages – this type of mortgage can be especially suitable for higher rate taxpayers. They allow you to overpay your mortgage to build up a “savings” balance that is offset against the amount you owe, so that you pay interest on the lower amount. This can work out more attractive then earning interest on your savings that are then taxed. Flexible mortgages may also be fixed, or variable rate and may offer discounts too.
- Speak to a mortgage lender and see what different rates they have to offer and they’ll be able to advise you which could be suitable for your situation. You could also speak to a mortgage broker like Ocean – we’ll be able to show you rates from a range of mortgage providers to help you find the best deal. Some mortgage deals are only available through brokers, so you wouldn’t be able to get these offers on the high street.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.