Choosing the Best Mortgage for Your Circumstances
Which is the best mortgage? You’ve decided to buy the home of your dreams, but now you have to secure the finance, a scenario that sends a chill down the spine of many house buyers every day. The trouble is there’s just so many options, and so much information to process.
Fortunately, House Tree Online Estate Agents Ltd is here to guide you through the process of selecting the best mortgage for your circumstances with a guide below to the types of mortgage currently available in the UK. Which one you choose depends on your current financial position and your plans for the future.
The two primary repayment mechanisms
In the UK, there are two main ways to pay for your home.
A repayment mortgage is the simplest way to manage your finances on a month-by-month basis. The money you borrow to buy your home is added to the interest applied. You then get a fixed monthly repayment figure, which should remain the same for some years. The money you pay goes towards both the interest and the initial loan. However, you might find that you pay off more interest than capital during the early years of the deal.
A repayment mortgage is a great option if you want certainty for the future. You can lock in your monthly repayment figure for several years, so you won’t need to worry about interest rate rises putting the squeeze on your finances. Also, you’ll be able to enjoy the peace of mind that comes from knowing your loan will be paid off at the end of the term.
An interest-only mortgage allows you to pay just the interest on your home loan — the initial loan amount always remains the same. While you are expected to make arrangements to pay the loan off at the end of the term, you can enjoy relatively low monthly repayments in the meantime.
This type of mortgage might appeal to you if you’re young or if you have a relatively small income. A lot of people opt for this kind of home loan because they expect their income to rise over the years. They can afford the relatively small repayments now, but they know that several years of pay increases will improve their finances in the future — at which time they can pay off the capital or switch to a different type of mortgage.
Choosing the best mortgage isn’t simple, you need to know how you want your interest calculated?
Once you have decided which of the main types of mortgage you’re going for, it’s time to select a particular product. Interest applies to all home loans but differs greatly as to how calculated. So choosing the best mortgage isn’t cut and dry, it depends on what you want and your circumstances.
Fixed interest rates
The interest rate you pay is fixed from the outset, and it usually applies for between one and five years. Regardless of what happens the base interest rate or other key indicators, the percentage you pay in interest remains the same for the duration of the term. Choose this type of mortgage if certainty is crucial to your financial planning. Yes, it might prove relatively expensive if interest rates fall, but it will provide the certainty you need.
Discount mortgages directly link to the lender’s standard variable rate (SVR), which can change regularly. While you may get a great deal now, however, things might not look so good if Bank of England’s base rate goes down — as the SVR is independent. A discounted rate might deliver some short-term savings, but it can be something of a gamble.
Tracker mortgages link directly to the Bank of England’s base rate of interest. In most cases, they will offer a rate of interest around one or two percent over and above the base rate. Unfortunately, this kind of product can be rather unpredictable, as it links to the current state of the economy. For instance, the current base rate is exceptionally low, and there’s a chance it will rise in the coming years — particularly if the Bank of England believes inflation is beginning to spiral out of control. Tracker mortgages are usually a good idea if interest rates are high but expected to fall.
Offset interest rates
An offset mortgage allows savings to be used to earn a discount on the rate of interest you pay. The lender withholds some of the interest you’d earn on your savings in exchange for a significant discount on your mortgage interest rate. If you have savings now, or you’re planning to save substantial sums in the future, this type of mortgage could be the most cost-effective option.
Don’t be left in the dark about the various mortgage options available to you. Speak with an independent financial advisor, mortgage broker, or call us at House Tree Online Estate Agents Ltd and find the best mortgage for your current situation.