As a first-time homebuyer, choosing the right type of mortgage that will perfectly suit your needs can often be a challenge. However, how much do you know about the different types of mortgages available and how they work?
With 5 partners and over 90 staff, based in our Stockport offices, our specialist legal teams work with private individuals and companies from all walks of life buying, selling, transferring or re-mortgaging their properties. Regardless of your needs, we can help find you the best solutions to get you on the property ladder.
In this blog, we’ve highlighted the different types of mortgages to help narrow down your options and what features you should look out for that will take you one step closer to becoming a homeowner:
There are two main types of mortgages, such as fixed-rate mortgages and variable mortgages, which include tracker, discounted rate and capped rate mortgages.
Fixed-Rate Mortgages
As the name implies, a fixed-rate mortgage allows you to pay a fixed rate of interest for a set term, between two to ten years. That means your monthly payments will remain the same and will not vary, regardless of whether or not your interest rates will increase in the future. Compared to the variable mortgages, you can rest assured your interest rate is set to stay the same upon an agreed period of time.
Generally, most people opt for a fixed-rate mortgage of two-year of five-year deals as that provides the best freedom and peace of mind. If you are the type of person who prefers moving houses after a short period of time, getting a two-year mortgage deal is ideal, while the five-year mortgage is more expensive, but it protects your interest rates from increasing over the next few years.
When comparing deals, it’s essential to analyse their upfront fees, the early repayment charges (EPCs) and the overpayments agreement to decide what works best for you. Once your fixed-rate period comes to an end, your lender will transfer you onto a standard-variable-rate (SVR) mortgage.
However, the number of fixed-rate mortgages has fallen significantly since the start of the COVID-19 outbreak. In November 2020, 3,147 fixed-rate deals were available, compared with 4,897 in March 2020.
Variable Mortgages
If you opt to go with a variable mortgage, that means your monthly mortgage payments can increase or decrease over time. As mentioned above, there are three popular types of variable mortgages you can choose from:
- Tracker Mortgages
- Discount Rate Mortgages
- Capped Rate Mortgages
A tracker mortgage is a type of variable mortgage that follows an external interest rate, usually the Bank of England base rate – with the rate you pay set at a fixed margin above that base rate. While usually offered for a period between one to five years, a tracker mortgage can be useful as the monthly payments can go lower in the future, which could help you pay off your mortgage early or make overpayments to reduce the interest rates.
In comparison, a discounted rate mortgage can offer you a price reduction from the lender’s SVR for a set period of time, usually between two to five years. However, bear in mind that your rates can go up and down once the SVR changes.
Lastly, a capped rate mortgage means that your interest rates cannot exceed a certain number, otherwise known as the cap. This deal can be effective as it guarantees that your repayments will never go over an amount of money, but they can still get lower over time if the rates go down.
Other types of mortgages
Apart from the fixed-term and variable mortgages, there are also a few kinds of mortgages that can benefit you in your homebuying process.
Buy to Let Mortgages
If you’re looking to buy a property just so you can rent it out, then a Buy to Let is the ideal type of mortgage for you.
The amount you can borrow is strongly linked to the amount of rent you need and your personal circumstances, such as the income you receive on a monthly basis.
Let to Buy Mortgages
This type of mortgage is designed for homeowners who want to let out their home to new tenants and buy another property for themselves to live in.
Similar to the Buy to Let mortgages, the amount of money you’ll be able to borrow is established after an in-depth credit check and proof of income, hence why you’ll need to make sure you have a good credit score to begin with.
Offset Mortgages
With an offset mortgage, you can use the balance of your savings or current accounts to help reduce the overall amount of interest you pay on your mortgage.
The main advantages of an offset mortgage include reduced monthly payments, the possibility to make overpayments and pay it off sooner and get access to tax benefits – you can take your money out at any time without paying tax, thus saving you money.
List of factors to consider when choosing a mortgage type
- Loan amount: The amount you borrow will impact the mortgage options available to you and the interest rate you’ll pay.
- Down payment: Your down payment affects the loan-to-value ratio, which can impact your interest rate and loan options.
- Credit score: A higher credit score can qualify you for better mortgage rates and loan terms.
- Employment stability: Lenders prefer borrowers with a steady income and job history, which can help them qualify for better mortgage rates and terms.
- Loan term: The length of your loan term can affect your interest rate and monthly payments.
- Affordability: Choose a mortgage that fits your budget and ensures you can make your monthly payments comfortably.
- Property type: Different mortgage options may be available for different property types, such as single-family homes, multi-unit buildings, or investment properties.
- Interest rate type: Fixed-rate mortgages offer stable monthly payments, while adjustable-rate mortgages can provide lower initial rates but may increase in the future.
- Lender reputation: Choose a lender with a good reputation, positive customer reviews, and experience in the type of mortgage you’re seeking.
As your trusted conveyancing experts and solicitors, we can help you compare mortgage deals so you can make the best decision that will kickstart your homebuying journey.
We will work together step-by-step and keep you in the loop with the latest changes in the property market, therefore, giving you peace of mind and confidence that you will receive the best value for your money.
Get in touch with our team today and we’d be happy to answer any of your questions and find you the best mortgage deals.
