As a first-time buyer, the mortgage market is certainly daunting. Even just the terminology can be confusing. For starters, there are lots of different types of mortgage available. What do they mean and how do you know which one to choose?
We’ve taken a look at the different types of mortgage below so you can see which one suits your particular circumstances.
Types of mortgage
Fixed rate mortgage
A fixed rate mortgage guaranteed your interest for a set period of time. This means your monthly repayments will remain the same until your deal comes to an end. The most popular deals are typically around 2, 3 or 5 years. Longer term ‘fix-and-forget rates’ are also available, up to 10 years or more.
When the fixed term comes to an end, you’ll automatically move to the lender’s Standard Variable Rate (see below) but you’ll also be free to switch to a new deal. If you come out of the deal early, you can expect to pay an Early Redemption Fee. This is usually a percentage of your outstanding balance but the amount will vary depending how far you are into your deal.
Taking out a fixed rate mortgage is good for buyers who want the certainty of knowing exactly how much they’ll be paying out each month. It can help you budget and manage your finances more easily.
On the downside, interest rates can be a little higher than other types of mortgage. It also means that if the interest rate were to fall, you wouldn’t benefit from a drop in your repayments.
Standard Variable Rate mortgage
The Standard Variable Rate (SVR) is an interest rate set by your lender. It can move up or down at their discretion. Fixed-rate mortgages (see above) as well as other types of mortgage, such as tracker or discount rate will usually switch to the SVR once the deal comes to an end.
If you are on the SVR, you aren’t tied in to any particular deal. This means you can move onto a different mortgage deal without facing any early penalty charges.
Because the rate is variable and the lender can change this up or down at any time, this could mean an increase or decrease in your monthly payments. However, the lender should give you advance notice of any changes.
Discounted variable mortgage
This type of mortgage is tied into the lender’s Standard Variable Rate. As the name suggests it offers a discount on the SVR for a set amount of time. If the SVR moves up and down, then your repayments will change in line with this.
A tracker mortgage is another kind of variable mortgage however, this one follows the Bank of England base rate, rather than the lender’s SVR.
Tracker mortgages are set just above the base rate e.g base rate plus 1%. If the Bank of England changes the base rate, your mortgage will follow suit, with your repayments increasing or decreasing.
As with other mortgages, you take a tracker mortgage for a fixed period of time. The rate reverts to the SVR once this deal comes to an end.
The base rate can change at any time, however this does come with warning and in the past few years has only changed a handful of times. It does come with less uncertainty than a fixed deal – whilst your payments can decrease they can also rise so you must ensure you are prepared for this.
Types of repayment methods
Not only are there different types of mortgage deal available but also different ways of paying back the loan:
This is the most common type of mortgage. It involves paying back the capital borrowed, as well as the interest on top. When the overall mortgage term has come to an end, you will own your home outright, having paid off the full balance with no outstanding debt.
With this type of mortgage, you will only ever pay off the interest on a monthly basis so your repayments will be much lower. However this does not reduce the capital of the mortgage and the balance will remain outstanding at the end of the term.
You will need to ensure you have a plan in place to repay the debt at the end of the term. This could be from the sale of the property, an ISA or other investments, but you will need to prove this to you lender before they agree to this type of mortgage.
Interest-only mortgages are much less common these days, due to the amount of risk involved for both lender and borrower.
If you opt for an interest-only mortgage, it is your responsibility to check that your future repayment plan is on track. If you are worried that investments won’t grow, it is wise to stick with a standard repayment plan.
Finding the best mortgage as a first-time buyer can be a difficult choice however at So Smart Money our mortgage experts are on hand to help you find a deal that is tailored just for you. Using our whole-of-market mortgage brokers, offering a wide range of deals, we can help you find the right deal for your needs.