What are my mortgage options?
When choosing a mortgage there are only two main things to consider: how the interest is calculated, and mortgage type. This guide is intended to cut through the information to give you a quick way of narrowing down your options.
Step 1:
When choosing a new mortgage, the most important thing to consider is how the interest will be charged on the capital loan amount. There are many options available, and they fall into two broad categories: fixed rate mortgage and variable rate mortgage.
Fixed rate mortgage
What is it? A mortgage product that has its interest rate fixed for a set period at the start of the mortgage term
Benefits Repayments remain unchanged during the fixed rate period, despite interest rises or falls in interest rates elsewhere
Best for Borrowers who want to retain control of their monthly budget and protect themselves from interest rate rises
Know your options When selecting a fixed rate mortgage the best idea is to find the lowest fixed rate that is available for the longest period. Longer periods may have higher interest rates than shorter periods.
Variable rate mortgage
What is it? These mortgages have interest rates that fluctuate as the lender raises or lowers their interest rates, usually in response to changes in the Bank of England base rate.
Benefits If interest rates drop during your loan term your monthly repayments will fall. This can make a big difference in the total amount of interest you repay on the loan.
Best for Borrowers who want to be able to take advantage of interest rate drops, and who have a certain amount of flexibility in their budget in case interest rates should rise during the loan term.
Know your options Variable rate mortgages come in a variety of forms. The two most common are:
Capped rate mortgages
What is it? This mortgage product has its interest rate capped at a maximum rate. If interest rates rise, they will only rise until the cap is reached, and no further.
Benefits You are able to take advantage of interest rate drops, while protecting yourself from very high interest rates
Best for Borrowers who have a degree of flexibility in their budgets, and are prepared to pay a slightly higher interest rate overall in return for the security of knowing what their maximum interest rate will be should the cap be reached.
Tracker rate mortgages
What is it? These mortgage products track the Bank of England base rate directly, rather than following the lender’s standard variable rate of interest
Benefits Interest rate drops are immediate, and will come into effect as soon as the base rate falls, as opposed to other variable rate products where you have to wait until the lender drops their standard variable rate, if they do at all. This can greatly reduce the amount of overall interest you repay.
Best for Borrowers with a degree of flexibility in their budget, who want to be able to take instant advantage of drops in the Bank of England base rate
Step 2:
Once you have decided whether you are better suited to a variable or fixed rate mortgage product, you should then explore your specialist product options. Most mortgage products come with various discounts or special offers in order to attract new business. Find the right one for you, and you could make some serious savings. Some of the most popular include:
Discounts Many mortgage products offer a discount rate at the start of the mortgage for a set period. The biggest discounts are available on the shortest periods, so it is important to find a happy medium between long period and big discount. Don’t choose a mortgage by the headline rate alone, because after this discount ends, the interest rate might be very uncompetitive, which can effectively negate the benefit of the discount. Look at mortgage products as a whole, taking into consideration the starting discount rate and the standard rate; also consider remortgaging at the end of the introductory offer in order to find a better rate with another lender.
Cash back Lots of lenders offer cash back at the completion of a successful mortgage application. Sometimes the cash is given in a lump sum to the borrower to do whatever you wish with; other lenders agree to pay for some of the fees involved with taking out a mortgage, such as valuation and survey fees. These deals can offer a good way to find extra cash to decorate your new home, or help cover the expense of moving home. Be aware that some deals come with a clause that the cash sum must be repaid if you repay the mortgage early.
Flexible These are specialist products that offer a greater degree of flexibility in the way your repay your mortgage. You can make regular overpayments, underpayments and take payment holidays, giving you greater control of your finances. These products are particularly good for borrowers with irregular incomes, such as those whose income is bonus or commission based.
Offset Offset mortgages allow you to reduce the amount of interest you repay on your mortgage, by allowing money held in certain accounts to offset the amount owing on your mortgage. If you have £5,000 held in a linked account, your mortgage amount owing will be £5,000 less than you have actually repaid as long as the money remains in the account. This means you will be getting charged interest on a smaller amount than you actually owe, which may greatly reduce the total cost of your loan in the long run.
Bad credit If you have a bad credit rating you may be finding it difficult to find a mortgage. However, there are many mortgage lenders who speciailise in dealing with bad credit applicants.
First time buyers There are many specialist mortgage products designed to help people onto the property ladder for the first time. Your options include guarantor mortgages, graduate mortgage and professional mortgages.
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