There are many types of mortgages out there and it can be confusing knowing which one might be the best. It used to be the case that new home buyers would get a free consultation with a financial advisor to help them understand about mortgages and to make recommendations. However, now financial advice has to be paid for and so many will try to make these decisions on their own. Although there is nothing wrong with this, it is important to make sure that you have an understanding of mortgage types so that you can make an appropriate decision.
Repayment Mortgage
A repayment mortgage is probably the most popular type and some lenders
will not have any others to choose form. It is pretty self-explanatory in that
you make repayments as well as interest payments each month. What this means is
that each month you will whittle down the amount that you owe and by the end of
the term of the loan there will be nothing left to pay. Many people enjoy
seeing the amount they owe go down and lenders prefer these as they can see
that borrowers are repaying.
Interest-Only
Mortgage
With an interest-only mortgage you only have to repay the interest each
month to the lender. This means that at the end of the term you will have to
come up with a lump sum of money to pay off the money that you borrowed. It is
risky for the bank as although the customer is obliged to invest money each
month so that they have enough to repay the mortgage at the end of the term,
this does not always happen. In the 1980’s for example, many households used
endowments, which were a type of investment, to repay their mortgages, but the
stock market did not do well and the value of the endowments fell and many need
to top them up in order to get their mortgages repaid. More recently the stock
market has also under performed to cause problems with investments or some home
owners have just not bothered to invest and therefore lose their homes once the
mortgage term is up.
Fixed Rate
Either of these mortgage types can be fixed or variable rate. A fixed rate
means that the interest rate that you pay does not change for a certain time
period. This is usually a number of years. The advantage of this is that you
will know exactly how much you are paying and will be protected from any rate
rises. However, if the rates fall then you will be paying the higher rate.
With fixed rate deals you can often be tied in to stay with that lender or else pay a significant penalty. You may even be tied in after the fixed rate ends and so you may have to stick with the lender at a high variable rate for a while. It is therefore wise to think hard before committing to something like this and being completely sure that you know what you are signing up for.
Variable Rate
A variable rate will change whenever the lender wishes to change it. This
means that it can go up or down. It will tend to be changed when the Bank of
England change the base rate but there is no specific time that it had to be
changed. This means that it will probably go up if the rate rises but may not
fall if it goes down. There is less certainty about what you might pay but you
may end up paying a lot less than on a fixed rate if rates fall.
Tracker
A tracker mortgage will track the base rate. This means that if rates fall
then you will immediately start being charged less interest but if rates rise
you will immediately start paying more. If you think that rates will fall in
the future then it can be a really good thing to sign up to as you will end up
repaying less in interest compared with a variable rate or a fixed rate, in
many cases. However, if rates rise you may end up paying more compared with
those protected on a fixed rate. It can be a bit of a gamble as to which to go
with.
Once you understand about the different types of mortgages you will be able to work out which might be the best one for you to use. There are a range of options and you need to understand each one and the implications of them. Consider whether you want to know what you are paying each month or are happy with it being varied and whether you want to repay the mortgage as part of your payments or raise the funds in another way. It is a big decision and could make a big difference to you in how much you end up paying out and so it is important to spend a lot of time thinking about it.
