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Mortgages guide

Getting a mortgage is one of the biggest financial commitments you will probably ever make. It’s important you understand what type of mortgage will be best suited for you. This guide provides you with information about the different types of mortgages which are available to help you decide which one is right for you.

1. Repayments vs Interest Only Mortgages

What is a repayment mortgage?

A repayment mortgage is a mortgage where your repayments are calculated to pay off all the debt and the interest over the term you agree, for example 35 years. It means that after you have completed all the monthly payments, you owe nothing in the end.

At first, your outstanding debt will be a large amount, so the majority of your monthly repayments will go towards paying off the interest. Eventually, as you reduce what you owe, most of your repayments will go towards paying off the debt.

What is an interest only mortgage?

Interest only mortgages is a mortgage where you just pay the interest during the term. Your monthly repayments don’t pay off any of your actual debt, it only covers the costs of borrowing the money. When the term (typically 35 years) is up on a £125,000 loan, you would still owe £125,000.

You have to pay back the amount you have borrowed in one lump sum at the end of the mortgage term. So if you get an interest only mortgage, you need to have a separate plan to pay off the debt. The lender will need to see evidence of a method you’ve set up to save up enough money to pay off the actual cost of the property.

We recommend repayment mortgages over interest

Although you pay more each month with a repayment mortgage, its the only way which guarantees you owe nothing at the end of the mortgage term.

2. Is a fixed or variable rate mortgage better?

What is a fixed rate mortgage?

A fixed rate mortgage is a mortgage where interest rates do not increase or decrease, so if interest rates were to change, your repayments wouldn’t. There are pro’s and con’s to fixed rate mortgages:

Pros

  • You will know exactly what your mortgage will cost
  • Your payments will not go up, no matter how high rates go
  • You know how much you pay so you can budget around

Cons

  • Starting rates are usually higher than on variable products
  • If interest rates fall, your payments won’t drop
  • If you want to get out early, you’ll usually pay high penalties

If you think a fixed mortgage is the kind of mortgage you want, think carefully about how long you want to fix for. Ideally, you don’t want to leave the deal before the initial period ends as there is usually and early repayment charge.

What is a variable rate mortgage?

A variable rate mortgage is a mortgage where interest rates will usually move up and down. There are two types of variable rate mortgages: trackers, discounts and SVRs.

Tracker mortgages follow the base rate set by the Bank of England, meaning the rate on repayments will move with UK rates, however the mortgage lender will usually charge a percentage point or two more. A discount tracker mortgage will decrease the percentage points off the tracker rate, not the base rate, for a set period.

Standard variable rate mortgage (SVRs) generally follow the same principle as a tracker mortgage, but that decision ultimately comes down to the mortgage lender.

Discount rate mortgages offer a discount off a lenders standard variable rate. Most of the discounts on offer tend to last around two or three years but there are lenders offering longer options.

Should I go for a capped deal?

A capped deal is a variable rate, a discount or a tracker mortgage which has a upper limit – it cant exceed no matter what the tracked rate rises to. They are usually offered and are very popular as people are usually frightened that interest rates could rise.

3. What length of deal should I choose?

Incentive periods range from two to ten years and making the decision of choosing the wrong length can be costly. You need to fully think this through as you could regret the choice you make and end up spending a lot more than what you need to.

Watch out for early repayment charges

To make sure you don’t change your mortgage once a better rate comes along, a lot of lenders impose an early repayment charge. Lenders aren’t allowed to stop you repaying your mortgage, but they are allowed to penalise you for doing it early. The charge will apply if you pay off the mortgage in full or pay the lender back more than you’re allowed to.

4. Do I want my mortgage to be flexible?

Now you have an idea of the key requirements for your mortgage, you now need to think about whether you want a mortgage that’s more flexible. This means that you’re allowed to over, under pay and borrow money back.

Offset Mortgages

An offset mortgage is a mortgage that keeps your mortgage debt and savings in separate pots with the same bank. Having an offset mortgage means that your cash savings are used to reduce the amount of mortgage interest that you’re being charged.

You are still required to make the standard repayment every month, however your savings helps to reduce more of the interest every month which will result in clearing the mortgage early.

As you’re repaying your mortgage off quicker, it will cost you less overall. The money you’ve saved can be withdrawn at any point, however it obviously no longer offsets your mortgage debt.

Current Account Mortgages

A current account mortgage is a mortgage which is combined with your current account so you only have one overall balance. So if you have money in your current account and a mortgage of £135,000, then you will be overdrawn.

The debt is smaller after you have had your salary paid in, however it will increase through the month as you spend your salary. Any extra cash savings can be added to get the balance decreased which is useful, however the majority of people dislike constantly seeing a debt figure in their bank account.

5. How do joint mortgages work?

When you take out a joint mortgage, the lender classes you both as jointly and severally liable for the debt. It is possible to take out the mortgage in one name, however only one income will be taken into account so you may not be able to lend as much as you could if there was two of you.

Lenders will be concerned about who else is living with in the property aged 17 or over and as to why they’re not on the mortgage. Their not fussed about your children, however they will be curious of you live with a partner and their name isn’t on the mortgage.

6. Guarantor mortgages

If a mortgage lender isn’t willing to lend you the amount of money you require, a guarantor mortgage could get you the loan amount you needed.

A guarantor is somebody who is legally required to pay off any payments that are required if you yourself don’t make payment. This doesn’t mean that they own the property, they have just signed a legal contract with your mortgage lender.

The lender will want your guarantor to seek independent legal advice before signing to ensure they know exactly what they’re signing for and so they fully understand.

Now you know what the different types of mortgages are, you have two options If you have a small deposit, read about the different mortgages schemes for information on Help to Buy and other mortgage schemes.

If you’ve a big enough deposit and income to buy a property outright, read about mortgage fees to find out about buying costs.

  • Mark Gerson

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