Buying a house can be a complicated process, with borrowers having to make decisions about their budget, the type of property they want, their solicitor and more.
One of the most important decisions you’ll have to make is deciding what type of mortgage you want to take. This isn’t helped by the fact that the mortgage products which are available can change.
So, whether you’re a first time buyer, buying to let, or planning on downsizing, here’s our guide to the different types of mortgages available.
Fixed rate mortgages have become increasingly popular with homebuyers. As the name suggests, the interest rate on these mortgages is fixed for an initial term when you take it out. This term can be two, five, or sometimes as much as ten years. A fixed rate mortgage ensures that your monthly repayments will stay the same over this initial period.
The main selling point for fixed rate mortgages is that it offers certainty about what your mortgage costs will be, allowing you to plan your finances more effectively. With speculation mounting that an interest rate rise may be imminent, many mortgage experts are advising customers to fix their mortgage for as long as possible to avoid any unexpected rate rises that may be coming.
One possible downside of opting for a fixed rate mortgage is that you will probably miss out on a more competitive deal if your lender’s standard variable rate (SVR) is lower than the fixed rate, or falls below it.
Standard Variable Rate.
The standard variable rate is set by your lender and varies from one lender to the next, though the average rate is currently around 4.5%. This rate is influenced by the Bank of England’s base rate, but isn’t directly tied to it and the lender can increase or cut this rate at any time.
With the base rate currently low, opting for an SVR can be good value, however, sooner or later this rate will go up and you have no control over when or by how much it increases, so it offers less certainty and security.
Another type of variable rate loan is a tracker mortgage. As the name suggests, a tracker mortgage tracks the Bank of England’s base rate, rising or falling as it does.
Typically a tracker mortgage will follow the base rate at a given margin above or below it. So, if your tracker mortgage were to be base rate plus 1%, that would mean your current interest rate would be 1.25%. Longer term tracker mortgages will usually have a larger margin, for example base rate plus 3.5%.
Tracker mortgages can either be taken as an introductory rate, usually for a period of one to five years, or they can cover the whole life of the mortgage.
With interest rates having been kept at historically low levels for years, tracker mortgages have offered some very good deals, however, interest rates can’t really fall any further and, as we noted above,
speculation is mounting that a rise in the base rate will happen quite soon, so these mortgages may lose their appeal for many borrowers.
All of the loans we’ve talked about have been repayment have been repayment mortgages, where you pay off the loan itself, plus some interest, every month. You can, however, also take out an interest only mortgage, where you only pay the interest on the loan every month.
This has the advantage of keeping your monthly repayments down, but does mean that you will need to have a repayment vehicle in place so that you can repay the full value of the loan when the term ends.
Interest only mortgages are popular with landlords who want to keep their monthly repayments down in order to maximise their rental yield. For other borrowers, taking out an interest only mortgage can be a risky strategy, as you may find you can’t afford to repay the capital on the loan at the end of the term, which could lead to your home being repossessed.
With so much to do and so many costs to meet when buying a house, you need an estate agent who will make the process as easy as possible for you. So, if you’re looking for a new home, take a look at our website or visit us in one of our branches in Templepatrick or on the Lisburn Road in Belfast and find out how we can help you find the perfect home.