When looking for a mortgage, its essential to understand the different products that are available so you can be sure you get the right one for you. Lenders offer different interest rate options and this will affect your monthly payments. So choosing the right deal could save you money.
With so many product choices available it is essential you get professional indepenedent advice.
Types of mortgage products available:
Standard Variable Rate Mortgage
With this mortgage, your payments will go up and down as the lenders standard variable rate goes up or down. Usually any changes in the lenders variable rate will be in line with movements in the Bank of England base rate. The Bank of England Monetary Policy Committee reviews this rate on a monthly basis.
Is it right for me?
Yes - if you can afford to pay more when mortgage interest rates go up and want to take advantage of lower payments if rates fall.
No if during the early years you would be unable to cope if repayments increased because of rising interest rates.
Base Rate Tracker Mortgage
This is similar to a variable rate mortgage. But the interest rate will go up and down exactly in line with any changes in the Bank of England base rate. Your mortgage payments will go up and down too as the interest rate changes. The tracker period is usually for a specified time, which can be from one year up to the lifetime of the mortgage loan. At the end of the tracker period, your mortgage interest rate will change to the lenders standard variable rate. This product may carry an early repayment charge.
Is it right for me?
Yes if you want to be sure your mortgage rate falls by the same amount as the Bank of England base rate falls, but the drawback is the mortgage rate also rises in step when the base rate increases.
No if you find yourself locked into a rate above the base rate, which may be higher than the standard variable rate.
Fixed Rate Mortgage
Your mortgage interest rate is fixed for a set period only, during which your mortgage payments will stay the same. At the end of the fixed rate period, your mortgage interest rate will change to the lenders standard variable rate. Fixed rate mortgages are usually available for between one and ten years, however they can be available for longer periods depending on market conditions. This product may carry an early repayment charge.
Is it right for me?
Yes if you need to budget with certainty for the next few years, or you think mortgage interest rates will rise, or both.
No probably not if you think mortgage interest rates will fall.
Discounted Rate Mortgage
The lender offers a discount off their standard variable rate for a set period, normally one or two years. Your mortgage payments will still vary in line with changes in the standard variable rate. At the end of the discount period, your mortgage interest rate will be the same as the lenders standard variable rate. This product may carry an early repayment charge.
Is it right for me?
Yes if money is tight when you first take out the mortgage, but youre confident your income will increase.
No if you wont be able to cope if interest rates rise later on, increasing your payments.
Capped & Collar Rate Mortgages
With a capped rate mortgage the interest rate can go up or down in line with movements in the lenders standard variable rate, but cannot go above a set upper limit, known as the ‘cap or ‘ceiling. This type of mortgage can also have a set lower limit, known as the ‘collar. For these mortgages the interest rate can move between these limits but cannot fall below the collar or go above the cap. This product may carry an early repayment charge.
Is it right for me?
Yes if you like to budget with some certainty, think mortgage interest rates might rise above the cap, or you want the security of knowing your payments cannot rise above a set level and would like to benefit from any fall in interest rates.
No if your mortgage adviser can find a fixed rate set at a lower rate than the capped rate, and you think rates are unlikely to fall below the level of the fixed rate deal.
Cashback Mortgage
The lender pays you a cash lump sum after completion, which you can use for any purpose. This product may carry an early repayment charge.
Is it right for me?
Yes if you need a cash lump sum, for example to do up your home, or you expect the cashback to more than compensate for any rises in interest rates during the period when an early repayment charge may apply.
No if you can manage without a cashback now and can get an alternative deal.
Remember your home may be repossessed if you do not keep up repayments on your mortgage.
Bluestone Asset Management is a fee based independent financial adviser firm based in London. We provide free interactive learning modules about finance and money on our main site http://www.bluestoneam.co.uk
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