When it comes to getting a mortgage on your first house or flat, the array of financial options can be very confusing. This will be one of the most important financial decisions you will make in your life, deciding on a mortgage can be worrying. What you need is sound financial advice to help you make the best choice for your circumstances. Here is a quick guide to the most common types of mortgages to start your decision-making process.
There are two ways to repay a mortgage;
This mortgage is also known as an interest and capital mortgage and this arrangement works by paying the monthly interest on the mortgage along with a percentage of the capital. The main advantage to the repayment mortgage is that you reduce the capital you owe every month; each time you pay off a small amount of the capital. This means that by the end of the mortgage term you will not be left with anything more to pay.
With an interest-only mortgage your monthly payments will be smaller than with a repayment mortgage. You will be paying back the interest due on the total amount you borrowed from the bank or building society. The advantage of this mortgage is that your payments are lower each month, and allow you to repay the capital by instalments at your own convenience. Interest only mortgages have become more heavily regulated in the market place over the last few years and if you wish to arrange an interest only mortgage, there is now strict criteria in place all applicants would need to meet to be eligible to apply for this.
When arranging your mortgage, there are different types of interest rates that will be available to you. See below a summary of the most common interest rates chosen;
With a fixed-rate mortgage you know exactly how much you are going to pay each month, for a fixed period of time. This is obviously a benefit when budgeting, as you know how much you will be paying, and you can set your spending accordingly.
When the term of the fixed rate product ends you usually will be transferred onto the lenders standard variable rate unless you have chosen to re-fix onto another rate offered by the lender or you have decided to remortgage.
Tracker Rate Mortgage
A tracker rate is a type of variable rate and as the name suggests the chosen interest rate tracks the Bank of England base rate (for example a tracker rate of 1% above the Bank of England base rate today – currently 0.25% – would give a pay rate of 1.25%). For more information visit www.openvisionfinance.com. With this mortgage you do not know exactly what you will be paying each month but one advantage can be that the rate is typically lower than with other rates in the market place – although of course this can be changed at any time depending on the movement of the Bank of England base rate. This interest rate therefore carries an element of risk.
Variable Rate Mortgage
A Variable rate mortgage is a rate where the lender sets their own rate of interest to be paid back; this can be increased or decreased at anytime by the individual bank or building society. There are different factors that can determine when the variable rate is changed, including the Bank of England base rate, The London Interbank Rate (LIBOR) movements and other market factors. As a result, your payments may vary should the variable rate change whilst you have this interest rate type.