If you are thinking of moving home, you’ll already know that gaining a mortgage is much more of a challenge than it was a decade ago. However, if you do get a mortgage, the currently low interest rate climate can then be a boon (providing you are willing to steel yourself for increases somewhere down the line). Here, you’ll find a quick guide to the most frequently used mortgage types in the UK. Added to this, a particularly useful and detailed explanation has been created by Experian, and you can access that here, with mortgage products explained.
Taking a financial time-out
It’s important to realise that gaining the mortgage of any one of the types you’ll find below depends on a range of considerations. Key amongst these, for all lenders, is your credit history – how well you have managed any credit you have had in the past. By assessing the information contained your credit report, together with the information you provide in your application form, lenders will give you a credit score, which says how credit worthy they think you are and, beyond that, can impact the rates and terms of any mortgage which is offered to you. To find out more, here’s a terrific video that takes less than two minutes to watch: http://www.youtube.com/watch?v=Ht0sVPITtso.
Considering four possible mortgage options
You’ll find a wealth of names and descriptions for the mortgages available in the marketplace. Finding yourself a highly-regarded mortgage broker can be a sensible step. However they are titled, here are a few popular options:
• A repayment mortgage does exactly what it says on the tin. Each month, you pay both interest and part of the capital sum. At the end of the term, a complete repayment has been achieved, although it’s worth noting that in the early years the vast majority of each payment is in interest
• An interest-only mortgage leaves the capital sum unchanged throughout the years, and monthly, you simply pay the interest due. While this sounds good, as the payments are lower, you also have to make provision (perhaps by investing in an ISA) to be able to repay the capital sum on the due date. One pitfall here is that you are then relying on the market to deliver the returns you need on that investment
• A fixed rate mortgage gives you the comfort of knowing exactly how much you will be paying every month, allowing you to budget effectively. It won’t change for an agreed period (usually between 2-5 years) no matter how the Bank of England, and other, interest rates fluctuate. When people believe rates will rise, this can be a popular option to consider. If rates fall, this isn't the best option.
• A variable rate mortgage allows your lender to change the rate of interest as they see fit (in the past, this would tend always to be in line with Bank of England recommendations – nowadays, much less so). Such fluctuations can have a sudden effect on your monthly budget, one up side is that the rate offered is often lower than that of a fixed-rate alternative (especially when interest rates are generally high). Discounts may be offered, for a short period, to tempt you. A tracker variation is still directly linked to the BofE rates.
A clever soul once described a mortgage as “A house with a guilty conscience”! When choosing your product, you won’t feel guilty, but should be wary – make sure that you understand all the conditions involved. Then, make a sensible calculation, just like those who use your credit score do when making an offer, and find a mortgage you can, quite literally, live with.