With different mortgage types to choose from, it can be difficult to find the right one for your particular set of circumstances.
Repayment Mortgage vs Interest-Only Mortgage
When choosing a mortgage, you might be offered either of these options when looking at the different ways you can repay your mortgage.
When choosing a repayment mortgage, you pay back the money you have borrowed on a monthly basis, alongside any accrued interest. Assuming you have kept up with your payments, your mortgage should be fully paid off when your mortgage term ends.
If offered an interest-only mortgage, you only pay off the interest on the loan you have taken out during the term, and not the capital itself. The advantage here is that your monthly payments will be lower, but you will still have to pay back the full amount of your lending in one lump sum at the end of your mortgage term. To convince a lender to give you an interest-only mortgage, you will need to evidence a saving plan to show them that you will have the money available to pay when your mortgage term ends.
Below, we will discuss some of the mortgage types that are available to you.
When you take out a fixed-rate mortgage, your lender will offer an interest rate that will stay the same for a set amount of time during your product term. This is usually between 1 and 10 years (although it can be more), and if it’s set out during the duration of your mortgage term, you will have paid off your loan at the same rate until the end of the term. However, if you haven’t paid off your mortgage at the end of the time set, then you will be transferred to a standard variable rate, which is the lender’s default rate.
Standard variable rate mortgage
When your fixed, discounted, or another type of mortgage ends, you will usually find yourself on a standard variable rate (SVR) mortgage. This will mean that your monthly repayments could go up or down at any time, depending on the rates your lender sets. However, in most cases, there are no early repayment fees if you decide to make a switch from your SVR to another lender, so if you aren’t happy with the rates they have set, you can research other mortgage providers for more favourable deals. Typically, SVR rates are higher than fixed-term rates, so it’s usually a good idea to find a new mortgage product when your fixed term ends.
Discounted rate mortgage
A discounted rate mortgage is a cheaper version of the lender’s SVR, with reduced prices for a certain amount of time. When the term of your discounted rate mortgage is up, you will then be transferred to the standard variable rate set by the lender.
Lenders will track a nominated interest rate (usually the base rate of the Bank of England) and will base your interest rates on this (as well as an added percentage), for an arranged amount of time. When the base rate goes up or down, your interest rate will be adjusted to reflect the changes. Some lenders will set a minimum interest rate to give you an idea of their lowest expected rate, but there is often no limit to the maximum amount of interest you could be charged.
Capped rate mortgage
Another variable rate mortgage, but unlike a tracker mortgage, there is a cap placed on the maximum limit you will have to pay. This can offer you peace of mind, as not only will you know the maximum amount you will ever have to pay, but you can also benefit from the lower repayments when the interest rates go down.
When you sign up for a cashback mortgage, you will get a lump sum back at the end of your mortgage term. This can be anything from £200 to £1000. While a cashback mortgage can appear attractive – that extra money will always come in useful – there are a couple of drawbacks. For one, you might have to pay a higher interest rate during the course of your mortgage, and you might have to pay higher fees at the outset.
As the name suggests, your payments can be flexible, so you can overpay or underpay each month, depending on how much you can afford. You can even take a payment holiday if needed. While this sounds like a great option, you might incur a higher interest rate with a flexible mortgage, so this needs to be taken into consideration.
What Mortgage Is Right For You?
Deciding which is right for you depends on your financial position, and how much deposit you are willing to put down at the outset. At CIS Mortgage Advice, we know how complicated it can be to choose the right mortgage, with a not-so-straightforward income so to help you find one that suits you best, contact us for guidance and support.