Types of mortgage
Once you've got to grips with repayment or interest only, you need to decide which type of mortgage is right for you. Of course, one major factor in your decision will be the interest rate. But as this can go up as well as down, you need to consider the fact that your mortgage repayments may change with them, unless you choose a fixed-rate option. Which is right for you will depend on your attitude to risk and how long you plan to keep the mortgage for. Fixed, capped discounted, variable...find out what they all mean.
Heres a guide to the different types of mortgage available:
Variable, or tracker mortgages
As the name suggests, the rate of interest and therefore, the amount you pay each month can vary. Which means it can go up, or down, depending on the Bank of England base rate. Every mortgage lender has a standard variable rate (SVR) of interest, which it sets for all mortgage deals.
The SVR is set in parallel to the base rate; it could be set at anything from a half to a few percent above it. So if your lender's standard variable rate is two percent above the Bank of England base rate, and that base rate is five percent - your mortgage will be payments calculated at seven percent. The base rate is set every month, so your mortgage payments could fluctuate as often. And while your mortgage payments may change along with the base rate, it's not guaranteed, as lenders don't always pass on the cuts.
Capped rates
A capped rate mortgage is subject to change, as with the variable rate, but is 'capped' at a certain level. This means that it will track changes in the Bank of England base rate, but if this starts to rise it won't go over the agreed cap rate that was set when you took the mortgage out. The benefit of this is that you can make the most of interest rate drops, but still be in control of your budget as you know the maximum amount your payments could rise to, if rates go up.
Discounted rate mortgages
A discount rate mortgage is where the lender offers you a lower standard variable rate (SVR) for an agreed period. So if the bank's SVR is usually five percent, you may be offered a rate of three percent for the first two years, making your payments lower. The rate will still fluctuate with the Bank of England base rate, but you'll benefit from the cut regardless of whether it goes up or down. A word of caution though, make sure you're prepared in advance for the rise in your payments at the end of the introductory period. If your mortgage has no redemption penalties, it could be a good time to try and renegotiate a better deal with your lender, or remortgage with someone else.
Fixed-rate mortgages
A fixed-rate mortgage allows you to budget with certainty as your payment will always stay the same because you agree to 'fix' the rate. This can be a great comfort if you see the base rate rise, but if it drops you'll still be paying the same - it's the risk you take for knowing exactly how much you'll pay each month.
Buy-to-let
A buy-to-let mortgage is an interest only option designed for people wanting to invest in property to rent out to tenants. To qualify for a buy-to-let, you'll need to satisfy your lender that the property you're buying will achieve the rental income you have specified and you will usually need to have a deposit of at least 20 percent of the value of the property.
Offset mortgages
Often sold as a way to pay off your mortgage early, the Offset principle is for people who have savings, even if they're only small. An offset mortgage can pool your finances including your current account, savings and mortgage, into one. It adds up your pooled assets, savings and money in your current account, and offsets them against your mortgage on a daily basis.
For example, if you have a mortgage of 100,000, savings of 10,000 and a typical current account balance of 1,500 when you get paid, instead of paying say six percent interest on your mortgage, earning three percent on your savings and nothing on your current account, the offset calculates that you have debts of 88,500 and charges you interest on that amount only.