Do I need to decide between an interest only mortgage and a repayment one?
You may well have heard terms like ‘interest only’ and ‘repayment mortgage’ bandied around, and are probably thinking that’s a good place to start. However, these days the most appropriate route -for just about every first time buyer – is a repayment mortgage. The reason for this is that there is a concern with an interest only mortgage that you’re not chipping away at the loan each time you make a monthly payment. You are only paying interest. Twenty five years down the line, when your mortgage policy expires, you will still owe all that you originally borrowed. That leaves a lender exposed for a long time. However, with a repayment mortgage, each time you make a monthly payment you are slowly paying back the amount you have borrowed, as well as interest. And that’s what lenders like.
As an aside, it’s worth noting that it’s actually much harder to get an interest only mortgage now even if you do want one. Many lenders have pulled out of offering them full stop. So on the whole, this article is focused on repayment mortgages.
What types of deal are out there?
As the name suggests, a fixed rate mortgage is one where the interest is fixed for a set length of time. It doesn’t change. If rates go up, you pay the same amount regardless whilst the rate is fixed. If rates go down, however, you also still pay the same amount. If you think you may move house during the term of the fixed period, it’s worth checking that you can move the mortgage to another property. Plus it’s also worth checking what (if any) penalties you might have to pay.
At the end of the fixed rate period, most lenders will move you onto their standard variable rate unless you make alternative arrangements.
A variable rate mortgage is one where the rate can change. The rate variation can be prompted by different triggers and you will need to check with your adviser what the trigger mechanisms are for the product(s) you are looking at.
There are quite a few different types of variable mortgage, but the most common ones include:
- Standard variable – where the lender charges their standard variable rate.
- Tracker – where the rate tracks either an economic indicator or another rate – often The Bank of England’s base rate.
- Discount rate – where a discount off the lender’s standard variable rate applies for a short time, often 2 or 3 years.
How flexible should a mortgage be?
There can also be additional flexible elements within a mortgage policy, so it’s a good idea to ask your adviser about these. However, to give you an idea, some examples are:
- Can I overpay? – Some policies enable you to overpay without penalty. This can mean you manage to pay your mortgage off quicker than predicted. It’s important to note, however, that the timing of payments can make a difference to how much benefit you’ll get with respect to reducing your interest payments. It’s best, therefore, to discuss this in detail with your adviser.
- Can I borrow back? – Some policies actually enable you to borrow back again if you’ve made overpayments.
- Can I take payment holidays? – Some lenders will allow you to not pay for an agreed length of time. This isn’t something to do lightly and you should discuss this option with your adviser before considering it.
- Can I offset my mortgage? – An offset mortgage keeps your mortgage and your savings in two different accounts. However, the savings portion can be used to offset what you pay each month in interest on your mortgage.
Are there other mortgage products available to first time buyers?
There are schemes available like ‘Shared Ownership’ and ‘Help to Buy’ that first time buyers can access. We’ve written a separate article on these, which can be found here.
Other articles in this series written for first time buyers…