Choosing the right type of mortgage can be time consuming but it is time well spent. There are two decisions that need to be made early on.
Whether you want an interest only or a repayment mortgage:
Interest only mortgage
With an interest only mortgage you only pay the interest on the sum borrowed which means that at the end of the mortgage term the amount that you initially borrowed will still be outstanding.
Repayment mortgage
With a repayment mortgage each month you pay not only the interest but also a proportion of the loan amount initially borrowed. As you will be paying off both capital and interest the monthly instalments will be higher than with an interest only mortgage, but you will be reducing the amount of your indebtedness as each month goes by.
The second big decision is what type of mortgage will suit you best. There are several alternatives.
1. Standard variable
With this type of mortgage the interest you pay is linked to the lenders Standard Base Rate which will move up and down with changes in the Bank of England Base Rate.
2. Fixed
The interest rate will be set at a fix ed percentage for a certain time period. The advantage is that you will have the certainty of knowing how much you will need to pay each month.
3. Capped
With these mortgages you will know that your monthly instalments will not go above a set figure within the fixed period. Below the capped figure however the interest rate can vary.
4. Discount
You will have an interest rate which is discounted below the lender’s Standard Variable Rate for a fixed period.
5. Tracker
The interest rate on a tracker mortgage tracks the Bank of England Base Rate which may be different to the Standard Variable Rate set by the lender.
6. Offset
With this type of mortgage, you can offset your savings against the mortgage loan amount. This will mean that you won’t receive any interest on your savings, but you will pay less interest on your mortgage.
A few other things to look out for are:
Early redemption charges
With many fixed rate, discounted or capped mortgages you may be required to pay an Early Redemption Penalty if you repay your mortgage within the first few years.
Cashback
Some lenders will give you a lump sum payment when your mortgage starts which can be helpful when you are moving home
Interest period
Interest can be worked out on a yearly, monthly or daily basis. Daily interest is usually better because you will pay less interest overall as each payment you make reduces the balance on which the next interest instalment is calculated.
Moving home can be a stressful process. Our conveyancing guide is intended to help you understand some of the important aspects of the conveyancing process. Click here to read more.
