Mortgages are a huge part of the buying process, obviously. They may seem daunting and confusing at times but once you have a better understanding of what they are and what they do, you can choose the right one for you.
You will need to understand interest rates, fees and what the mortgage offers before going ahead with your choice, but don’t panic as it’s far less complicated than it sounds.
So what are the different types of mortgages?
Fixed Rate Mortgage
Fixed rate mortgages, do exactly what they say – the interest rate does not change throughout the term. You would normally take out a fixed rate mortgage for anywhere between two and five years, but it is possible to take it out for longer.
Choosing a fixed rate mortgage ensures that you will know exactly how much you mortgage is costing you at any set point throughout the term.
The only negative aspect of a fixed rate mortgage is if the interest rates fall you are still stuck with the original set rate.
The tracker mortgage is a changing mortgage due to it being linked with the Bank of England base rate. Your mortgage rate will change if the base rate changes and will do so throughout the period of your deal.
Currently the base rate is set at 0.50%, if you were to take out a tracker mortgage rate at 2% this will leave you with an interest rate 2.50%.
If the rate was to increase to 1% the mortgage rate would increase to 3%, adding an extra £25 in monthly repayments on an £100,000 mortgage.
You can take out a tracker mortgage for two or five years but will be charged a penalty if you want to opt out. You can also opt for a lifetime or term tracker which is completely penalty free and very flexible – perfect if you do not want to be tied down into your mortgage.
A discount mortgage is another type of variable mortgage but this time it relies on the lender’s standard variable rate (SVR) which can be changed at any point – even if there is no change in the base rate.
Like the other mortgages, a discount mortgage can be taken out for one to five years and, similarly to tracker mortgages, you will be charged a penalty if you were to opt out.
As it suggests, discount mortgages tend to be at lower rates than fixed rate mortgages due to the simple fact that they are variable and the rate could increase or decrease at any given point.
You do not get the security of knowing what you are paying at each given month, like you do with a fixed rate mortgage.
Unlike the other mortgages, the offset mortgage is based on your savings. Instead of earning interest on your savings, the money is used against your mortgage so you pay less interest on that debt.
This helps clear your mortgage much quicker, potentially saving you thousands of pounds that you would normally pay in interest over the years.
The way it works is, if you wanted to take out a £100k mortgage but already had £20k in savings, you would only be charged interest on £80k of the mortgage.
But this increases your monthly repayments as you would be clearing your debt quicker and the rates tend to be higher than the standard mortgages.
Confused? Talk to us at VMH, Edinburgh’s favourite property solicitors.