Buying a home is a big deal, and finding the correct mortgage is just as important. Often, there is information overload surrounding the topic of borrowing, and it can be tricky to know where to begin in your search. That’s why we’ve written this Emoov guide, which is designed to take you through the different types of mortgages available and equip you with the right information to secure your perfect mortgage.
What mortgages are available?
There are many mortgage products out there to pick from, but they tend to fall into two categories: fixed rate and variable/tracker. The ‘rate’ refers to the interest that you have on your mortgage.
What is a fixed rate mortgage?
Having a fixed rate mortgage means that the interest you pay is fixed and does not change over a period of time. This period can range from two to ten years, and you are guaranteed to pay the same back each month. The majority of fixed rate mortgages come with an early repayment charge, which is a fee for switching to another rate, paying more of your mortgage each month, or paying off your mortgage early.
Once the mortgage period has come to an end, you will automatically be switched to a standard variable rate (SVR). An SVR is the interest set by the lender (in most cases, the bank). They can set it as high or low as they like and can change it at any time. In most cases, before the end of your fixed-rate period, the lender will contact you and offer you an alternative. It is also worth checking with a mortgage broker if you can secure a better deal with another lender.
What is a tracker or variable mortgage?
A tracker mortgage is a variable rate mortgage. It works by tracking specific interest rates – more often than not the Bank of England base rate– and then adding a certain amount on top of this.
With this type of mortgage, your repayments will rise and fall with the interest rates. For example, if the interest rate goes up so does your payment, and if the interest rate goes down, you guessed it, so does your payment. In this case, it is very important to understand how you will budget for rises in mortgage payments- luckily, your mortgage broker can help you with that.
What is a discounted rate mortgage?
A discounted rate mortgage is also a variable rate mortgage. This type of mortgage gives you a discount on your lender’s SVR for a fixed period of time, usually two, three or five years.
This is not the same as a fixed rate mortgage because they are still connected to the SVR. If the lender raises interest, even by a small amount, your monthly repayments will increase. Unlike the SVR, a discounted mortgage rate usually includes a fee for paying your mortgage off early or remortgaging, although this is only during the discounted period.
How much is the total cost of a mortgage?
Unfortunately, interest rates alone can’t predict which mortgage is cheaper. While a mortgage might have a lower rate, it may end up being more expensive due to the fees it involves. So, when thinking about the total cost of a mortgage, it is vital you take into consideration the interest rate, fees and incentives.