Mortgage Advice from Better Money Advice: Choosing the right mortgage for your particular circumstances can be a difficult task. Dale Lovell outlines what you need to know to find the right mortgage for you.

Mortgage Advice: What is a Mortgage Exactly 

In many ways mortgages are like cars: most people have one; some people spend a lot on them, while others do their utmost to spend as little as possible on them. The one big difference between cars and mortgages, aside from the obvious that you can’t take the family for a spin to the seaside in your mortgage, is that while most people always look to change their car every few years, few of us do this when it comes to our mortgage.

This is despite the fact that if we did switch our mortgages as often as our cars the majority of us would be financially far better off in the long-term.

If you are thinking about re-mortgaging soon, or are looking for a first-time mortgage, despite the numerous names for mortgages out there such as capped, tracker or endowment, there are essentially only two main types of mortgage available: repayment or interest only.

Mortgage Advice: Repayment Mortgages vs Interest-Only Mortgages

With a repayment mortgage each of your monthly payments will contribute towards paying off both the capital (the amount you owe) and the interest. Generally, you pay more interest at the beginning of the mortgage, when the amount you owe is greater, followed by more payments to your capital towards the end of the mortgage.

With interest-only mortgages, as the name implies, you only pay back the interest on what you have borrowed. You will not have to pay-back the capital on your mortgage until the agreed term is reached with your lender, normally twenty-five years. The idea is that the extra money you would have spent on repaying the capital over this time period is invested elsewhere, so that you can make enough money over the life of your loan to repay the lump sum you initially borrowed at the beginning of the mortgage.

This type of mortgage is known as an endowment mortgage. Endowment mortgages can work well for some people, but there are risks involved. The big danger is that your investments will back-fire leaving you with insufficient funds to pay off your mortgage when the term of the loan ends. Also, it is worth noting that interest only loans will typically charge more interest than repayment mortgages.

Once you have decided what type of mortgage you want to take out – repayment or interest-only – you will have to decide on what type of interest rate to go for. There are many types of interest rates to choose from, such as fixed rate, Standard Variable Rate and base rate tracker.

Mortgage Advice: Fixed Rate Mortgages

A fixed rate mortgage, as the name suggests, is fixed at a set rate so you know exactly how much you have to pay each month. Fixed rate mortgages are a good choice when interest rates look like they are going to go up, but at a time when interest rates could be going down they are perhaps not such a good investment.

Mortgage Advice: Standard Variable Rate Mortgages

A Standard Variable Rate (SVR) is the most common type of mortgage a lender will offer. It is, as the name implies, their standard offering, onto which customers can append additional packaged rates, such as a capped rate. Unlike a fixed-rate mortgage, the amount you owe each month with an SVR mortgage can change in line with the Bank of England base rate – when interest rates go up so does the amount you owe, and when interest rates go down, the amount you owe each month will too. Although lenders set their own rates of interest they invariably follow the example set by the Bank of England base rate, usually offering somewhere between 1.5% and 2% above the base rate.

Mortgage Advice: Discounted Rate Mortgages

Introduced as an attractive incentive to encourage customers to take out a loan, these days most lenders offer some sort of discounted mortgage rate. A discounted rate usually means that at the beginning of your mortgage you will pay a rate of interest that is considerably less than the lender’s SVR. Discounted mortgage rates typically only last for a relatively short while - two to three years – after which time your mortgage rate will revert to your lender’s Standard Variable Rate (SVR). There are some attractive offers available for discounted mortgages, but before choosing, it is wise to check that a lender has a competitive SVR too, as you will be repaying your loan at this rate for a lot longer than the initial discounted rate: don’t be dazzled by the enticing discounted rates alone.

Mortgage Advice: Capped and Tracker Mortgages

Other common mortgage products include capped rate and tracker mortgages. Again, similarly to Discounted mortgage rates, both capped and tracker are usually only offered for a set period of time, after which, your mortgage will revert to the SVR of a lender.

A capped rate of interest means that you will know the maximum amount you have to pay, effectively safeguarding yourself against any unaffordable price hikes. Typically, if interest rates fall considerably below the agreed capped rate, the lender’s SVR will be charged. A tracker mortgage is similar in many ways to the Standard Variable Rate of a lender; however, it usually offers better interest rates than the SVR. A tracker mortgage shadows the Bank of England base rate by a set percentage for an agreed period of time, after which your mortgage will revert to the lender’s SVR.

Mortgage Advice: Other Mortgages

In recent years lenders have become more creative in the mortgage products that they offer, with a number of innovations becoming increasingly popular. Flexible mortgages may be a good choice for some, as they take into account your changing financial situation and allow for overpayments, underpayments and even payment holidays, as well as one-off lump sum payments. Cash-back mortgages are also increasingly popular, and may be well suited for those hoping to renovate a property. When you take out a cash-back mortgage, not only do you get a loan to buy your property, you also get a cash-lump sum to do with as you please – you do have to pay it back though!

Another mortgage option is the one pioneered by the likes of Intelligent Finance, who refer to it as Offseting. This product links your current account, savings and mortgage together and typically pays less interest on your savings in return for a better mortgage deal.

Mortgage Advice: Penalties

Before choosing a mortgage it is essential that you look out for any penalty charges that you could incur. Most mortgages have penalties for missing a payment, but consumers should also keep an eye out for switching penalties, too. Some mortgages also have do not allow over-payments and charge stiff penalties for paying-off the loan early: read the small print and ask for clarification before committing to any mortgage.

Choosing the right mortgage for you is perhaps the most important financial decision you can make and we recommend that you seek independent financial advice before deciding on a mortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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