Whether you are a First Time Buyer in Grimsby trying to get onto the property ladder or Moving Home for a new start, you will soon realise that there are lots more mortgage types out there than you realised. Some are more popular than others and some are harder to find. To make you more aware of some of the mortgage types available to you, we have put together a list of the most common mortgages that lenders offer. We have also made a video for each mortgage type, we hope that you find them easier to understand as some can seem a little complicated.
Watch more of our mortgage guides on moneymanTV or check out our “Mortgages Explained” playlist here.
A fixed-rate mortgage is quite self-explanatory. Having one means that your mortgage payments are going to stay the same for a set period of time. You need to agree on the set period with your lender. Usually, people choose a fixed-rate mortgage between 2-5 years but you can go up to 7 or even 10.
The problem with long term fixed-rate mortgages is that you are tied into the payments for a very long time and a lot can change in 7 or 10 years. You can’t predict what will happen to the economy and interest rates that far ahead. So to benefit you more, taking our a 2 year fixed-term and renewing to another rate every 2 years could save you money down the line.
A tracker mortgage means that your interest rate will track the Bank of England’s base rate. This means that the lender does not offer the rate, they just get it directly off the Bank of England. You will be paying a percentage above the Bank of England base rate. In an example, if the base rate is 1% and you are tracking at 1% above base rate, that means you will be paying a rate of 2%.
If the Bank of England’s interest rates are really low, a lender will not offer you one of these as is it will not benefit them. However, if you are on a tracker mortgage when they are low, you will get a low mortgage payment bill at the end of the month.
When you take out a repayment mortgage this means that each month you are paying capital and interest at the same time. So as long as you keep your payments up to date for all of the mortgage term, the mortgage balance is guaranteed to be paid off at the end and the property becomes yours.
This is the most risk-free way to pay your capital back to the lender, in the early years it is mainly the interest that you are paying and your balance will reduce very slowly especially if you have taken out a 25, 30 or 35-year term. This situation switches in the last ten years or so of your mortgage, where your payments are paying off more capital than interest and the balance will come down much faster.
Whilst many buy to let mortgages are set up on an interest-only basis, it is much more difficult to get a residential property on an interest-only basis. It is much less likely for lenders to offer an interest-only product now. However, there are certain circumstances where this can be an option.
These include downsizing when you are older or have other investments what you will use to pay the capital back. Lenders are very strict when it comes to offering these products now and the loan to values are a lot lower than back in the day.
When you have an offset mortgage, your lender will set you up a savings account to go alongside your mortgage account. The way this works is like, for example, you have a mortgage balance of £100,000 and £20,000 is deposited into your savings account, you only pay interest on the difference, so in this case, £80,000. This can be a very efficient way of managing your money, especially if you are a higher rate taxpayer.