Finding the perfect mortgage has never been easy. First you need to figure out the
differences between the available options and then you have to sift through and
decide which is the best one for your circumstances. This short explanatory guide
to the mortgage market will outline the types of mortgage currently available and
the various types of interest rate that apply to them.
Capital Repayment Mortgages and Interest Only Mortgages
There are basically two main types of mortgage to choose from:
- Capital repayment mortgage,
- Interest only mortgage
A capital repayment mortgage uses each of your monthly repayment to pay the interest
on the loan for the month plus a small amount off the capital you initially borrowed.
This means that at the end of the loan period, which is normally 25 years, the debt
is cleared and you owe nothing. For the first few years most of your monthly payment
goes to paying the interest each month and you actually pay very little off the
capital. As the amount of the loan decreases though the interest it accrues also
decreases and more of your monthly repayment goes to paying the capital.
An interest only mortgage is different in that you only pay the interest on the
loan each month. There is no capital payment and so this type of mortgage seems
to be cheaper. At the end of the loan terms though, you are expected to repay the
capital that you originally borrowed and how you do this is up to you. Most people
choose to take out an associated endowment policy which will cover the capital payment
at the end of the loan terms. Other options include opening an ISA account with
a standing order and buying a set number of Premium Bonds each month that will cover
the amount owed when sold.
Buy-to-Let Mortgages
Buy to let mortgages are a special type of mortgage that allow landlords to buy
a property and then rent it out to a third party. The approval criteria for buy
to let mortgages are quite strict and most decisions are based on the amount of
rental income that can be generated from the property i.e. the rental income from
that property has to be at least 130% of the proposed monthly mortgage repayment.
The landlord will also need a minimum of 15% as a deposit and he/she will have to
own a main residence that they occupy.
Buy to let mortgages are rarely approved if the proposed landlord has mortgage arrears
on another property, has been declared bankrupt, has county court judgements or
defaults on any other loans in their name. Saying this though, buy to let mortgages
do often get a lower than typical interest rate and can save the borrower hundreds
of pounds each year.
Interest Rates and Mortgages
There are various deals with regards to mortgage interest rates and the amount you’re
charged each month depends on the Bank of England base rate. The most popular choices
include the following:
- Fixed Rate Mortgages – with this type of mortgage the interest rate
is fixed at a specified percentage for an agreed period of time. This can range
from 2-5 years and is a good way to budget for your payments. The drawback with
fixed rate mortgages is that should the bank base rate fall you don’t benefit
and you could pay more than you need to over the months. It is important to check
how long you are tied to the fixed interest rate before you can swap to a different
product without being penalised.
- Variable Rate Mortgages – this type of mortgage has an interest rate
that tends to rise and fall in line with the Bank of England’s base rate.
Lenders are not obliged to change their rates to reflect the base rate changes though.
This means that falls in the base rate aren’t automatically passed on to you
as a customer, although they should be at some point down the line. Very few borrowers
start with a variable rate mortgage and it is much more likely that a fixed rate
mortgage or discount rate mortgage reverts to a variable rate at the end of an agreed
period.
- Tracker Rate Mortgages – these are similar in their workings to variable
rate mortgages. The difference is though that tracker rate mortgages are tied into
the Bank of England’s base rate so any increases and decreases are mirrored
and passed on to you. The interest rate you pay is set slightly higher than the
bank base rate. Increases can be very costly but decreases can save you a good sum
of money over the months.
Obviously there are other types of mortgage available and it doesn’t hurt
to look into these as well. The above is just a guide to the most popular type of
mortgage and the interest deals you can get. It is advisable to use a comparison
website at the start of your search or hire the services of a qualified mortgage
broker. This way you can guarantee finding the best product for you.