There are thousands of mortgages around so which one do you choose? There are two main types of mortgage, either repayment or interest-only.
With a repayment mortgage you make a payment every month to the mortgage lender which includes both interest on the mortgage and a portion of the capital. Over time the capital decreases in size, thereby reducing the amount of interest payable, so more of your payments can be channelled into paying capital.
The benefit of repayment mortgage is that you can be sure your debt will be cleared by the end of the term providing you maintain the repayments throughout. It also gives you a transparent view of your mortgage and won't be affected by any fluctuations in the stock market.
With an interest only mortgage, your monthly payment only cover the interest due, making no payment towards the capital. you have to arrange a repayment vehicle, that will provide the necessary funds to repay the capital in full at the end of the mortgage term.
Interest-only mortgages can be useful if you are expecting a lump sum payment at the end of the mortgage term.
Most borrowers set up an investment vehicle into which they make regular payments. Examples include endowment policies, Individual Savings Accounts (ISAs), pensions plans, buy to let investments or a combination of different investments.
The benefit of an interest-only mortgage is that your monthly repayments to your lender can be significantly less. However the disadvantage is that you may not have enough funds to repay the capital at the end of the mortgage period as investments can go down as well as up.
Standard Variable Rate (SVR)
This is the lenders basic lending rate, which follows fluctuations in the Bank of England Base Rate and market conditions in general. Many borrowers move into this rate when their initial special offer period has ended and never move again.
-Usually there are no Early Repayment Charges
-The rate is usually higher than other special offers available the unpredictability of interest rate movements makes it hard to plan your finances, and the costs of your mortgage may rise rapidly if interest rates go up.
Trackers work in the same way as Standard Variable Rates. However instead of the fluctuations being determined by the lender the interest rate mirrors a rate set by an independent authority usually the Bank of England.
-The interest rate is guaranteed to reflect movements in the market rates when the Bank of England Base Rate falls so do your payments.
-There can be heavy Early Repayment Charges during the initial period when the Bank of England Base Rate rises your payments increase.
A discount rate is like a variable rate in that it follows either the Standard Variable Rate or a tracker rate. However it does so at a set discount and for a set period. Usually the shorter the discount period, the greater the discount the price of the discount rate is usually an Early Repayment Charge if you take your mortgage elsewhere during the term of the discount.
-The discount helps to free money for other expenses
-The rate shifts to the lender's Standard Variable Rate at the end of the discount period. The tie-in can apply beyond the initial discount period. The Early Repayment Charge can be expensive.
With a fixed rate, the rate is fixed for a given period - normally 2 to 5 years. This means you will know exactly what your repayments are going to be during the given period.
-Fixed rates are usually extremely competitive, particularly in a low rate environment. You will know exactly what your mortgage will cost you.
-There is a risk that rates could fall, leaving you on an uncompetitive rate Early Repayment Charges can still apply even after fixed period has ended.
Rates on this product will not rise above a certain agreed level.
-You are protected from interest rises, but free to benefit from falls.
-The capped rate will be generally higher than a fixed rate for the same period.
A cashback mortgage offers you a lump sum cashback at the start of the mortgage, which you can use for expenses. You will normally receive 5%-6% of your mortgage.
-You receive a lump sum to help you with expenses.
-There can be steep Early Repayment Charges for a longer period than most other types of mortgage