When you’re buying a home for the very first time, choosing a mortgage that is right for your circumstances can seem like a minefield. Our simple guide will explain the sort of mortgages you can access and take the pain out of figuring out which one suits you.
First, let’s examine exactly what a mortgage is. A mortgage is a long-term loan, usually taken out over 25, but perhaps 15, 20 or 30, years to buy a property. This loan is secured against your home, meaning the lender can repossess the property if you fail to keep up your repayments.
The rate at which the loan is made will vary depending on the deal you agree with your lender.
To ensure that you can afford the repayments, even if the interest rate rises by up to 3 percent, lenders will carry out “stress tests” on your finances, examining your income and outgoings to gauge whether you can afford to pay over the lifetime of the loan.
So, now you know what a mortgage is, what are the different types?
This is a home loan in which the interest rate is not fixed and your payments will rise and fall as interest rates rise and fall, paying the Standard Variable Rate (SVR). Lenders often offer two different variable rate mortgages: tracker and discount.
On this type of loan, your interest rate will “track” the base rate of the Bank of England. The current base rate is 0.5 percent and a typical tracker, usually fixed for two, three or five years, will be base plus 3 percent, for example. When the fixed period ends, you move on to the SVR. Shop around and you might source a “lifetime” tracker mortgage that lasts the entire loan term.
Choosing a discount mortgage means you will be the SVR set by your lender with a fixed discount. For example, when the SVR is 4 percent, you may be offered a discount of 1.5 percent, meaning you’re paying an interest rate of 2.5 percent for a fixed period.
The same interest rate will be applied for the entire term of the mortgage on a fixed-rate deal, irrespective of whether rates rise or fall.
Lenders set their own SVR, which is not directly linked to the Bank of England base rate but is influenced by any changes to the base rate. On an SVR mortgage, your repayments will change, up or down, depending on the changes applied by the lender, which can be done at any time.
Flexible, offset and current account mortgages
A flexible mortgage deal will allow you to make overpayments and underpayments to the overall loan, usually a fixed percentage of the total in any calendar year, without being penalised. Offset mortgages allow you to use any savings to reduce the amount of interest you pay on a daily basis. A current account mortgage rolls your current and savings accounts into one with the mortgage loan with any credit reducing the interest owed. You’re likely to pay a higher interest rate on these types of mortgage simply because of the flexibility they give you.
If you’re a first-time buyer, check out Homeward Legal’s comprehensive First-Time Buyers’ Hub where all your questions about purchasing for the very first time are covered in detail.