Before you choose a specific deal, you need to decide what type of mortgage is the most appropriate for your needs.
Your monthly payment fluctuates in line with a standard variable rate (SVR) of interest, which is set by the lender. You probably won’t get penalised if you decide to change lenders and you may also be able to repay additional amounts without incurring a penalty. Many lenders won’t offer their SVR to new borrowers.
These schemes allow you to overpay, underpay or even take a payment ‘holiday’. Any unpaid interest will be added to the outstanding mortgage, while any overpayment will reduce it. Some have the facility to draw down additional funds to a pre-agreed limit.
Your monthly payment fluctuates in line with a rate that’s lower, or more likely higher than a chosen Base Rate (usually the Bank of England Base Rate). The rate charged on the mortgage ‘tracks’ that rate, usually for a set period of two to three years. You may have to pay a penalty to leave your lender, especially during the tracker period. You may also be liable to pay an early repayment charge if you overpay on your mortgage during the tracker period.
A tracker mortgage may suit you if you can afford to pay more when interest rates go up – and, of course, you’ll benefit when they go down. It’s not a good choice if your budget won’t stretch to higher monthly payments.
An offset mortgage enables you to use your savings to reduce both your mortgage balance and the interest you pay on it.
For example, if you borrowed £200,000 but had £50,000 in savings, you would only have to pay interest on £150,000. Offset mortgages are generally more expensive than standard deals – but they can reduce your monthly payments whilst still allowing you to access to your savings.
Like a variable rate mortgage, your monthly repayments can go up or down. However, you’ll get a discount on the lender’s SVR for a set period of time, after which you’ll usually be switched to the full SVR. You may have to pay a penalty for both overpayments and early repayment and the lender may choose not to reduce (or to delay reducing) its variable rate – even if the base rate goes down. Discounted rate mortgages have the advantage of offering a gentler start to your mortgage repayments, at a time when money may be tight. However, you must be confident that you’ll be able to afford your repayments when the discount period ends and the rate increases.
In recent years, the government has backed a number of schemes (the ‘Help to Buy’ and ‘Shared Ownership schemes, for example) to support aspiring homebuyers. We can explain how these schemes work and whether you meet the eligibility criteria to benefit from them.
With a fixed rate mortgage the rate stays the same, so your payments are set at a certain level for an agreed period. At the end of that period, the lender will usually switch you onto its SVR. You may have to pay a penalty to leave your lender, especially during the fixed rate period. You may also be liable to pay an early repayment charge if you overpay during the fixed rate period.
A fixed rate mortgage makes budgeting much easier because your payments will stay the same during the fixed rate period – even if interest rates go up. On the other hand, it also means you won’t benefit if rates go down.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE