When embarking on the journey of purchasing a new home or remortgaging as a contractor, the multitude of mortgage options available can often be overwhelming.
Are you inclined towards a fixed rate mortgage, where the monthly repayments remain constant, or a tracker mortgage, which offers the potential for lower repayments but with the possibility of fluctuation?
In this article, we cover the various types of mortgages that are at your disposal.
These include repayment mortgages, interest-only mortgages, fixed-rate mortgages, tracker mortgages, standard variable-rate mortgages, discounted-rate mortgages, flexible mortgages, capped-rate mortgages, and offset mortgages.
However, before delving into the intricacies of these mortgage types, it may be prudent to gain a preliminary understanding of the mortgage size that aligns with your financial capabilities. Our mortgage calculator is designed to assist you in this regard.
Repayment Mortgages
A repayment mortgage provides the opportunity to gradually repay both the loan amount and the interest on a monthly basis. The key advantage of this type of mortgage is that by the end of the mortgage term, you will have full ownership of your home.
Each payment made reduces the outstanding loan amount, thereby increasing your equity stake in the property. Homeowners with a higher equity stake are eligible for lower mortgage rates, as the most favourable interest rates are typically reserved for those borrowing 60% or less of their property’s value. Additionally, repayment mortgages offer a wider range of mortgage products, making them more readily available.
Interest-only Mortgages
Under an interest-only mortgage, you only pay the interest on the loan and do not repay the principal amount. The repayment of the loan is deferred until the end of the mortgage term. For example, if you initially borrowed £100,000, you would still owe £100,000 at the end of the term.
The advantage of interest-only mortgages is that the monthly repayments are significantly lower compared to repayment mortgages. However, borrowers must have confidence in their ability to repay the outstanding debt at the end of the term.
Lenders consider interest-only mortgages to be higher risk, resulting in stricter affordability criteria. They often require borrowers to have a substantial equity stake in their home, which may pose challenges for first-time buyers.
Fixed Rate Mortgages
Fixed-rate mortgages are a popular choice because they guarantee a consistent interest rate throughout the duration of the product. This means that regardless of any fluctuations in interest rates, you will know exactly how much you need to repay each month.
Fixed-rate mortgages can be obtained for various periods, such as one, two, three, five, ten, or even fifteen years. Lenders refer to this fixed-rate period as an “incentive period.”
Currently, lenders are offering more favourable rates for five-year fixed-rate mortgages compared to two-year fixed-rate mortgages. If you secure a good rate, a fixed-rate mortgage can provide peace of mind.
Tracker Mortgages
Tracker mortgages are linked to the Bank of England base rate. However, tracker mortgages typically have an interest rate set higher than the base rate. For example, you might pay the base rate plus 3%, resulting in a mortgage interest rate of 8.25% (Base Rate 5.25% at time of writing).
Like many mortgages, tracker mortgages often have an introductory deal period lasting between two, five, or ten years. After this period, you will transition to the mortgage provider’s standard variable rate.
Standard Variable Rate Mortgages
Banks and building societies determine their own standard variable rates, which are often the most expensive mortgage options available. Currently, the average range for standard variable rate mortgages is between 7% and 8.75%.
If your mortgage transitions to the standard variable rate at the end of your deal, your monthly payments will increase significantly. Additionally, since it is a variable rate, your lender has the ability to change the standard variable rate at any time. It is generally advisable to search for another mortgage deal when your current one ends, rather than continuing with the standard variable rate.
Discounted Rate Mortgages
A discounted rate mortgage offers an interest rate that is set below the lender’s standard variable rate (SVR). For example, if the lender’s SVR is 6%, a discounted rate mortgage may be set at 1% below that, resulting in an interest rate of 5%.
These mortgages can be set for a period of two years, five years, or for the entire mortgage term. However, similar to variable-rate mortgages, the repayments on discounted rate mortgages may vary from month to month.
Flexible Rate Mortgages
A flexible rate mortgage provides additional benefits compared to a standard mortgage. With flexible rates, you have the option to overpay, underpay, and even borrow money back from the mortgage.
Typically, borrowing money back is only possible if you have already made overpayments. Similarly, if you wish to take a payment holiday, the same principle applies. It is important to note that when arranging a payment holiday, the missed payments are added to the remaining mortgage balance, resulting in higher monthly repayments. Some mortgages already include flexible features.
Capped Rate Mortgages
Capped rate mortgages offer payment security by placing a cap on the interest rate, ensuring that your payments will not exceed a certain amount. However, these mortgages operate on a variable rate, allowing you to benefit from lower payments when interest rates decrease.
Capped rate mortgages typically have a higher variable rate compared to the best tracker and discounted deals. This is because they provide security through the interest rate cap. Capped rate mortgages are usually offered as an introductory deal, and once the deal ends, you have the freedom to remortgage to a new one.
Offset Mortgages
Particularly popular amongst contractors Offset mortgages allow you to link your mortgage to your savings. The balance of your savings is used to offset the interest charged on the mortgage, resulting in interest being calculated on the mortgage balance minus your savings.
For example, if you have a mortgage of £100,000 and savings of £50,000, you would only pay interest on £50,000 of the mortgage. Your savings remain accessible, but they are used alongside your mortgage to reduce the amount of interest you pay.
The team at My Contractor Broker will work with you to establish the best option available to you based on your individual circumstance. You can call the office on 02394 211122 or use our mortgage calculator below.