Knowing which type of mortgage to opt for when buying or re-mortgaging a house is vital to you getting the best deal and ensuring you can pay it off as fast as possible. All mortgages function in fundamentally the same way (a loan on a property which is gradually paid off to a lender), but can differ in terms of interest rates, fees and repayment methods.
Your personal financial situation will determine which type of mortgage is best for you. Most mortgages fall into either a ‘repayment mortgage’ or an ‘interest-only mortgage’.
Here at House Sales Direct, we have prepared a guide to help you determine which mortgage you should opt for, depending on your personal situation.
Most mortgages fall into the category of repayment mortgage. These are mortgages where you repay the capital amount originally borrowed, as well as the interest over the agreed repayment period. This allows you to build equity over time and eventually you will own the property outright.
If you decide to move whilst still paying off the mortgage, you can choose to pay the original mortgage and take out another one on your new property, or you can transfer your current mortgage over to the new property, known as ‘porting’ your mortgage.
A type of repayment mortgage, these mortgages use a fixed interest rate for a set amount of time and so are not affected by fluctuations in interest rates. Once you take out a fixed-rate mortgage you will be locked into it for that set amount of time; if you wish to leave, you will have to pay exit fees. The set amount of time that the interest rate is fixed is known as the fixed rate period and usually the first 2 to 5 years of the agreed term. Once this period has ended, you’ll be transferred to your lender’s standard variable rate, which will likely be higher. It’s at this point that many choose to re-mortgage, switching to a more competitive deal.
The certainty that this provides can be especially appealing to first-time buyers who want to know exactly how much they will need to budget each month. If you think it is likely that interest rates are going to increase, this is also a good option.
A variable-rate mortgage, as you might guess, is in essence the opposite of a fixed-rate mortgage, where the interest you pay each month varies depending on fluctuations and the Bank Rate.
There are different types of variable-rate mortgages, with the interest paid calculated in different ways. The mains ones are:
A Standard variable-rate mortgage, which uses an interest rate set by the lender, not the Bank of England, although this is often a key factor in determining the rate.
A tracker mortgage, which follows the Bank of England Base Rate, plus a few percentage points set by the lender.
A discount mortgage, where a discount is applied to a standard variable-rate mortgage.
An interest-only mortgage, another type of repayment mortgage, requires you to repay the monthly interest over the course of the agreed term, however, the capital amount borrowed is not paid back until the end of the term. This means you will therefore need to be able to pay a large amount all in one go at the end.
An advantage of an interest-only mortgage is that the monthly amount that you pay is much lower than with a repayment mortgage. The downside is you will need to make sure you have the funds available at the end of the term in order to repay the capital amount, otherwise you may need to sell the property to cover what you owe. In the long-term, interest-only mortgages normally mean you will end up paying more as you are paying back interest on the whole loan, as opposed to the decreasing amount with a repayment mortgage.
An interest-only mortgage is therefore best suited to those who want to benefit from lower monthly payments but know they will have the ability to pay off a large amount when the agreed term ends.
This article was written by an online estate agent House Sales Direct. If you wish to sell your house fast and for free, then head over to the House Sales Direct website for more property related information and enquiries.