Buying your first home can be an exciting yet daunting time, with the thrill of finally owning your own property coupled with the struggles of sorting out every aspect.
Securing a mortgage is a necessity and when you’re looking at options for buying your first property you may not realise there are many different mortgage choices available.
Which one is best for you will depend on personal circumstances, finances and the property itself. In order to be fully prepared when researching and finally being approved for a mortgage, it is a good idea to understand each different type and the advantages and disadvantages each one holds.
As the name suggests, fixed rate mortgages come with a set interest level that stays the same throughout the agreed period, usually between one to ten years. This means your mortgage repayments won’t change and you can easily plan ahead for each payment.
If interest rates rise yours will stay the same, saving money. However, there is no benefit if interest rates fall as you are charged a large amount for leaving the mortgage early.
Before the mortgage ends ensure you’ve got another lined up too, as most lender’s usually move it over to an SVR mortgage with a higher rate.
Sometimes called a reversion rate mortgage, standard variable rate (SVR) mortgages use the lender’s default rate. When other mortgages come to an end normally you will be transferred onto an SVR mortgage until you take out another deal.
This offers plenty of flexibility as you can leave at any time without suffering consequences and will benefit from a fall in interest rates.
Usually this only happens when the Bank of England adapts its base rate, making it harder to budget as it can increase at any time. For those on tight financial limits this can be more of a gamble.
The majority of tracker mortgages move in line with the Bank of England’s base rate, just at a set margin (such as 1 or 2% above or below). When the base rate changes it means your mortgage rate will as well.
So if you have a tracker rate at 2% and the Bank of England’s base rate is 1% but moves up to 2% then your mortgage repayment will rise to 3%. Normally these mortgages last between two and five years.
These are much shorter mortgages, lasting just two or three years normally as they provide a discount off the lender’s SVR. A 2% discount from a lender charging 6% SVR will result in paying a 4% rate, providing a much smaller starting rate and therefore lower monthly repayments.
It is worth shopping around for the best deals as some lenders will have smaller discounts but lower starting rates anyway. Lenders still have the power to increase SVR at any time so you could end up paying the same or more than other lenders offer without discount.
Monthly repayments can therefore increase when you don’t expect as they’re not linked to the Bank of England rates.
Offset mortgages are more complicated, linking savings in with repayments. Rather than earn less interest on your savings than is being paid out to cover mortgage costs, your savings are set against your mortgage so less interest is paid on that.
For example, £25,000 savings on a £100,000 mortgage mean you’re charged interest on a £75,000 mortgage. Though it will have been calculated for £100,000 so it gets paid off quicker.
This saves on you paying interest and provides tax benefits but the rates on offset mortgages tend to be a bit higher than other options. It is only worth it if you have decent savings to use.
The rate moves in line with the lender’s SVR in the case of having a capped rate mortgage. The cap means that the rate you are paying cannot go above a certain level even though it will still vary.
It is important to budget based on the top level the rate can reach just to be on the safe side. It will also fall in line with SVR but the rate and cap can be set higher than other mortgage types. Carefully consider which mortgage suits your situation best before taking one out.
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