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Fixed-Rate Mortgages vs Standard Variable-Rate Mortgages
You first need to consider the differences between a fixed-rate deal and a variable-rate deal. These are the most popular mortgages you can get, and most lenders have these two options available.
Fixed-rate mortgages
A fixed-rate mortgage deal means that your interest rate does not change for a fixed period of time. The fixed-rate period is usually between two and 10 years, based on the mortgage offer you receive.
What this means for you is that you know exactly how much to budget for your monthly repayments during that time. If your fixed-rate deal is for 10 years, then for the next 120 months, your monthly payments stay the same.
Fixed-rate deals are the most popular types of mortgages due to the stability that they offer. If you already have a good relationship with the lender, you may receive a very good fixed-rate mortgage deal.
It is important to note that if you do wish to settle your mortgage before the full mortgage term, you may have to pay an early repayment charge.
A fixed-rate mortgage is best if you are working with a strict budget.
Standard variable-rate mortgages
A standard variable-rate mortgage changes as the interest rate changes. Basically, your personalised mortgage rate is linked to the lender’s standard variable rate, which is usually linked to the Bank of England’s base rate.
The downside to a standard variable-rate mortgage is that when the interest rate goes up, so does your monthly payment. However, when the interest rate drops, so does your instalment amount.
A standard variable-rate mortgage is best for you if you are not worried about the mortgage rate fluctuating.
Other Mortgage Types
Interest-only mortgages
If you have a very good credit score and want to have lower initial payments, you may want to consider interest-only mortgage repayments. For this type of mortgage, your monthly repayments will only consist of the interest for a set period of time. This means that you don’t actually pay the mortgage amount. This could be for a set term of five or 10 years.
However, you would still need to pay the mortgage amount at a later date. When you get to this part, you may need to either sell the property or, if you have saved up or come into an inheritance, pay the mortgage amount in full.
Even though this may sound like an attractive payment plan, an interest-only mortgage does carry heavy risks. Your circumstances change, and if you have not planned properly to settle the outstanding amount, you could be left homeless. Also, if the property value decreases and the amount you owe is more than the value of the property, you will be left with negative equity.
If you are purchasing a property with the view to reselling it, then an interest-only mortgage may be suitable for you. This mortgage type could also be attractive if you are looking for a buy-to-let property.
Repayment mortgages
A repayment mortgage is one where you pay off both the interest and the capital. This means that at the end of the mortgage term, you will own your house fully. In the initial years of a repayment mortgage, you will pay off more of the interest. However, as time goes on, you will pay off more of the capital. This is one of the more popular mortgage rate options in the UK.
Repayment mortgages are best suited for you if you like the comfort and stability of knowing that after your last repayment, your home belongs to you in full.
Discount mortgages
A discount mortgage is similar to variable-rate mortgages in that the interest rates vary; however, this mortgage offers a percentage discount on the rate. Discount mortgages are always based on the lender’s standard variable rate. For example, if you get a discount rate of 0.5%, you will pay 0.5% less than the standard variable rate.
There is usually a bottom cutoff line, which is generally the interest rate where you started. So, if the interest rate drops drastically, you won’t benefit much from this, as you would sit on the cutoff line until the interest rate increases again. Additionally, if the interest rate soars, then you would have to pay higher interest rates even though you took the discount mortgage option.
If your potential lender offers discount mortgages and you are looking for lower monthly repayments, especially in the beginning, then a discount mortgage would be your best option.
Buy-to-let mortgages
If you have plans on becoming a landlord and you are purchasing a property to let out, then the buy-to-let mortgage option may be the right deal for you. There is a different set of criteria to qualify for this kind of repayment mortgage, and the interest rates may be higher as well. However, it does offer you an opportunity to create an additional monthly income by letting the property.
The buy-to-let mortgage option is most suitable for potential landlords.
Offset mortgages
Having an offset mortgage may be a wise move. If you have a savings account, this can be linked to your mortgage payments. The amount in your savings would be offset against the mortgage amount. This means that you would pay interest on a smaller amount of your mortgage, which reduces the interest you pay.
Because the money in the savings account is used to offset your mortgage, it reduces your interest and can lower your monthly repayments.
The bigger the amount in your savings, the less you will pay overall.
Tracker mortgages
Tracker mortgages are similar to standard variable rate deals, except that they are directly linked to the Bank of England’s base rate. Whereas variable-rate deals are linked to the lender’s standard lending rate, a tracker mortgage works in conjunction with the country’s base rate. If the base rate rises, so do the rates of tracker mortgages.
The benefit of a tracker mortgage is that it generally has lower mortgage rates than a fixed-rate mortgage.
A tracker mortgage is best if you want to start at lower interest rates but are not concerned with fluctuations in your monthly repayments.
Guarantor mortgages
If you do not have a lot of credit history behind you or if you have a poor credit record, you could still qualify for a guarantor mortgage. If a family member stands as a guarantor for your monthly payments, then a guarantor mortgage could be offered.
This is the type of mortgage you may need if you are perhaps younger and haven’t had a good opportunity to build a solid credit record. Guarantor mortgages basically guarantee the lender that they will still receive their repayments.
Capped-rate mortgages
You can have capped-rate mortgages, which are variable-rate deals with an upper limit that will not be passed within a fixed time frame.
For example, if you have a capped-rate mortgage for five years, it will be set at a variable rate that will not extend past the upper limit during the five years.
Having a capped upper limit is similar to a fixed deal in that it provides you with certainty of your maximum repayment for a time period.
Capped-rate mortgages are suitable for you if you want to have the benefits of a variable-rate deal, but you are also worried about how high the interest rate can climb.
Joint mortgages
When applying for a mortgage, you could do it either on your own or apply for a joint mortgage with a partner, like a spouse, family member, or friend.
The benefit of having a joint mortgage is that it increases your buying power. A potential creditor will take the combined income and credit records into consideration. It could have a positive effect on your mortgage rates and the types of mortgages you are offered.
Specialised Mortgage Types
There are special types of mortgages that cater to specific needs and requirements. For instance, you can get a Sharia-compliant mortgage that works on a profit-sharing basis in line with Islamic principles.
There is also a lifetime mortgage, which is designed for the elderly looking to buy a home.
Self-build mortgages are available, too. These types of mortgages are for people who want to build their own homes from scratch.
Basically, there is a home loan to suit every person which can ensure that no matter what your circumstances are, there is always a solution and a home for you.
FAQs
What types of mortgage should I consider as a first-time homebuyer?
The types of mortgages you should be looking at as a new home buyer will be based on your affordability and job stability. If you are not worried about interest rate hikes, then consider a variable-rate mortgage.
You need to consider what types of mortgages you can comfortably accommodate in your budget over the next few years. If you are worried about rate fluctuations, then look at a fixed-rate mortgage instead.
What is the downside to a fixed-rate mortgage?
Fixed-rate mortgages provide a safe zone of stability. You know how much your repayment will be for a fixed period, so you can budget better. However, if the interest rate goes down, your interest rate remains where it is. Unfortunately, with fixed-rate mortgages, you do not benefit from a fall in rates at all.
Can I qualify for a mortgage with a poor credit score?
There are mortgage products designed for clients who do not have a strong credit record. One option is to have someone stand as a guarantor for your loan. It would be best to speak to a mortgage broker or advisor who can assist you with the process and help you establish who will be able to offer you the right type of mortgage with decent mortgage rates.
SOURCES
https://www.lloydsbank.com/mortgages/help-and-guidance/moving-home/what-is-negative-equity.html