Are you ready to take on the Great British Mortgage-Off? Interest-only. Standard variable. There’s more than just one type of mortgage to plump for. When it comes to deciding on your particular recipe, will you choose a fixed-rate, where your monthly payments stay just the same, or a tracker mortgage with potentially lower repayments but could be swayed by some rather unsavoury fluctuations in the market?
Let’s explore the tastiest types of mortgages available. Find out where to find the creme de la creme of deals. Because after all, the proof of the pudding is in the mortgage. Or something like that. On your marks, get set, broker!
First things first. It’s best to check what you can afford in terms of mortgage repayments. Try using an online mortgage calculator to get an idea. As our own Paul Hollywood of real estate, Mark explains, ‘when you get a mortgage you can either go down the route of simply paying the interest off, at a cheaper monthly cost, or you pay the interest and capital (repayment) which is what most people go for. Once you have decided, then you can look at what mortgage type you want to go for’ he says, with an unflinchingly blue eyed stare and a flick of silver fox bouffant. So what are you waiting for? Fire up your ovens and let’s get cooking…
These types of mortgages allow you to pay off your debt with a side helping of monthly interest. The sweetener here is that at the end of your mortgage term, you’ll own your home outright like a showstopper cake that you don’t have to share. Each payment you make slices off a little more of what you owe. Your equity stake (the percentage of your home that you own) increases accordingly.
Homeowners with larger equity stakes can whip up offers from lenders for lower mortgage rates, as they are often reserved for those borrowing 60% or less of their property’s value. Lastly, you’ll have far more of a delectable selection when it comes to choosing a mortgage product as they are as popular as a Victoria sponge for residential buyers.
With an interest-only mortgage, you will only need to pay the interest rather than the loan itself. Then, like a grand finale showstopper, the debt is repaid at the end of the mortgage term. Therefore, if you borrowed £100,000, you’ll still owe £100,000 in your final technical challenge. While your monthly repayments will of course be lower. Say for example, a £200,000 interest-only mortgage at 4.5% over a 25-year term would be £749 a month, compared with £1,111 for a repayment mortgage. You will however need to be as confident as a star baker that you can afford to pay the outstanding amount at the end of the term. This type of mortgage of course comes with much stricter criteria. There is a higher risk of defaulting, so perhaps not the one for you first time bakers in the tent.
Fixed-rate mortgages are a consistent recipe for success in mortgage world as the interest rate is guaranteed for the length of the deal. So you can set your timer in confidence, knowing exactly how much you’re repaying every month regardless of whether Prue likes your cherry bakewells or spat them out with a groan. Your fixed rate timer can be set between one and 15 years, which is quite a hefty slice of peace of mind. Currently, lenders are offering better rates for five year fixed rate mortgages rather than two years, so it’s worth weighing up your options before picking the first glacé cherry out the jar and thinking about the long run…
Who remembers taco week in the tent? What a wild card. Tracker mortgages, much like taco week, aren’t hugely popular these days. They essentially ‘track’ the Bank of England base rate, and is usually set higher than the base rate. Just like most deals, trackers usually have an introductory deal period that lasts between two and 10 years, after which you’d transition onto the mortgage provider’s standard variable rate. Now heads up bakers, Mark Hollywood is back in the tent with a little bit of advice: “this type of mortgage would have been popular over the last 15 years where interest rates have been very low. My mum was on a tracker which had a base rate + 0.5% for years.
This meant that she only had to pay the equivalent of a Freddo bar each month for her mortgage. You probably wouldn’t do a tracker mortgage right now as the base rate is 5.25%, unless you were extremely confident that this rate was going to come down dramatically.” (Do bear in mind that Freddo bars have actually gone up with inflation to the price of £3,600 so it’s not quite such a good deal Mark’s mum had after all.) Anyone else fancy a Freddo now? Or a Taz bar?
Now bakers, there are actually five more different types of mortgages, including Standard variable rate, Discounted rate, Flexible, Capped rate and Offset mortgages. But as Mark ‘pastry eyes’ Hollywood puts it, “generally only investors will go for interest only mortgages and residential buyers will go for a repayment and then choose a fixed rate mortgage. So you don’t really have a huge choice of different mortgages, you have two; Repayment or Interest only.” Which might help reduce your analysis paralysis when it comes to perusing the tastiest of mortgage selections. Should you need some guidance with your mortgage application process, don’t hesitate to give us a call and our merry band of property experts will drop their treacle tarts to help faster than you can say SOGGY BOTTOM.
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Davies & Davies Estate Agents, 85 Stroud Green Road, London, N4 3EG
Article & images by Barefaced Studios
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