Are you thinking of buying a new home or re-mortgaging? Are you bamboozled by the number and type of mortgages that are available and can’t figure out where to start? You’re not alone! Mortgage lenders change their products regularly and often try to differentiate themselves by using different names for them. Ultimately, though, there are a couple of basics around mortgages. Once you’ve understood them it’s easy and we’re here to help – read on for a beginner’s guide to mortgages. Using an independent financial adviser, such as our Plutus Wealth team, can also help you find the best deal for you. Find us on www.plutuswealth.com.
A couple of basics
One thing to keep in mind when looking at mortgages is that there are effectively two main types:
- Fixed rate. These have a set interest rate which does not change for a defined period of time – typically two, three or five years.
- Variable rate. These have an interest rate that can vary over time.
There are also two ways to pay off a mortgage:
- Repayment. With a repayment mortgage you pay off part of the capital borrowed each month as well as a portion of the interest. By the time you reach the end of the mortgage term you will have paid everything off and be mortgage free.
- Interest only. You will only be paying off the interest, not the capital. At the end of the mortgage term you still have the full amount you borrowed left to pay. This is a good option if you can invest the mortgage amount in order to repay it later. Or you may be a first-time buyer and want to get a foot on the ladder. You can use the time to increase your income and then switch to a repayment mortgage.
Rest assured that all mortgage lenders are regulated by the Financial Conduct Authority and the Prudential Regulation Authority, which operates on behalf of the Bank of England.
Fixed-rate mortgages
If you need to have a set budget every month and know exactly what you are paying, then fixed-rate mortgages are a good option. There is a downside though. They will typically have a higher interest rate than variable-rate mortgages. This means that if interest rates fall your payments will not, they will remain the same.
If you choose a fixed-rate mortgage look out for any charges that may apply if you want to switch before the end of the deal. Start looking for a new deal a few months before it runs out so that you don’t get switched over to the higher standard variable rate.
Variable-rate mortgages
Here there is a lot more choice available, with each mortgage lender honing their products to be as competitive as possible. They work on the basis that each lender has a standard variable rate (SVR). They can set this as they choose and change it as they like. It is set against the Bank of England base rate – which is currently 0.75% – and then built on to create their mortgage product. Typically, with variable-rate mortgages you can overpay when you want to and can leave at any time.
The most popular types of variable-rate mortgage include:
- Discount mortgages. Lenders will offer a discount on their SVR for a set time period – say, two or three years. When shopping around, keep in mind that SVRs are different for each lender. Don’t be seduced by a high discount without all the details. Read the small print and ask what the SVR is. You could find that a lender offering a lower discount on a lower SVR could be cheaper than one with a higher discount.
- Tracker mortgages. These will set an interest rate that tracks that of the Bank of England. If the base rate changes, so does the tracker mortgage rate.
- Capped-rate mortgages. These move in line with your lender’s SVR but will be capped. The cap is usually set pretty high but helps you to budget, knowing that your payments can’t go above a certain amount. They can also drop if the SVR falls.
- Offset mortgages. These will link your savings and current accounts to your mortgage, acting as an overpayment to help you clear your debt early. The interest that you pay will be on the difference between the accounts.
Still confused? Why not let our Plutus Wealth team help? As independent financial advisers it’s our job to find the best mortgage for you and your circumstances. And we’re not tied into any lender, so can trawl the market for all available products in order to find it. Call us on 020 7871 5200 or email us at info@plutuswealth.com and let us help you take the next step.
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