Which mortgage is right for me?

Thursday, October 25, 2007

At Solution Mortgages we offer a range of mortgage and remortgage products to accommodate the diverse needs of our applicants. We have provided the basic details below to help you make a more informed choice about what mortgage may be best suited for your circumstances.

Fixed Rate Mortgage

With a fixed rate mortgage your payments will remain the same for as long as the mortgage is fixed (typically 1-5 years).

At the end of the fixed period the mortgage will change to a variable rate. You will be able to remortgage at this time should you choose, however early redemption penalties may apply.

If the bank’s base interest rate rises, your payments will not, which is excellent if you’re on a strict budget.

You’ll always know exactly how much your mortgage payments will be for as long as the rate is fixed for.

If general interest rates fall below the figure you’ve fixed your mortgage at, you don’t get to take advantage of these savings and may have to continue to pay the higher mortgage rate.

Variable Rate Mortgage (Tracker)

With a variable rate mortgage, your interest rate is linked to the Bank of England’s base rate and moves up and down in line with it.

This means that if the base rate rises by .5% or lowers by .5%, the interest rate on your mortgage (and your monthly payments) will rise or lower by just as much.

If the base rate goes down, you’ll benefit from lower monthly payments.

If the base rate goes up, so do your mortgage payments.

You may not always know what your mortgage payments are going to be from one month to the next.

Discount Rate Mortgage

A discount rate mortgage is essentially a standard variable rate mortgage, so it still moves in line with the Bank of England’s base rate, but it also has a discount thrown in for a set period of time (typically 1-5 years.)

An example would be a lender offering 1.5% off of their standard variable rate for a period of 3 years.

Like a variable rate mortgage, if the base rate goes down so do your mortgage payments.

With the discount thrown in, it often means that you’ll have a couple years of lower than average payments, which is especially good if you’re just starting out and have stretched your budget to its limits.

Also like a variable rate mortgage, if the base rate goes up, so do your payments.

Depending on how the base rate moves, you may not always know what your mortgage payments are going to be from one month to the next.

Repayment Method

There are two main repayment methods that you can consider when taking a new mortgage.

Capital repayment

Your monthly payments gradually pay off the amount you owe as well as paying the interest charged on the loan. Provided you make all the agreed payments, the loan will be fully paid off by the end of the mortgage term and you will own your property outright.

Interest only

Your monthly payments cover only the interest on the loan. They do not pay off any of the original loan.

You will need to arrange to pay separately into a savings or investment scheme (eg. pension mortgage or endowment) to build up savings to pay off the mortgage at the end of the term.

It is your responsibility to make sure you have enough money to repay the mortgage at the end of the term, otherwise you could lose your home.