When you start out looking for a mortgage you will soon realise that there are lots of different options available and each has advantages and disadvantages depending on your individual situation.
A fixed-rate mortgage means that your mortgage payments are going to stay the same for a set period of time. You can set the length of which you want to fix your payments for, typically this being 2, 3 or 5 years or longer. And no matter what happens to inflation, interest rates or the economy you know that your mortgage payment, usually your biggest outgoing, will not change.
A tracker mortgage means that your interest rate will track the Bank of England’s base rate. So in other words, the lender that you are with does not actually set the rate themselves, you will be paying a percentage above the Bank of England base rate. In an example, if the base rate is 1% and you are tracking at 1% above base rate, that means you will be paying a rate of 2%.
Back in the mid-2000s, these deals were very popular, as the rate you where tracking was a fraction above that of the base rate. These deals aren’t as attractive anymore, however always remember that it is a variable rate so if the Bank of England base rate goes up, your mortgage payments will also increase.
When you take out a repayment mortgage this means that each month you are paying capital and interest combined. So as long as you keep your payments going for the full length of the mortgage term, the mortgage balance is guaranteed to be paid off at the end and the property becomes yours. This is the most risk-free way to pay your capital back to the lender, in the early years it is mainly the interest that you are paying and your balance will reduce very slowly especially if you have taken out a 25, 30 or 35-year term. This situation switches in the last ten years or so of your mortgage where your payments are paying off more capital than interest and the balance will come down much faster.
Whilst many Buy to Let mortgages are set up on an interest-only basis, it is much more difficult to get a residential property on an interest-only basis. Back in the ’80s and 90’s how a mortgage would work is that you would take out an interest-only mortgage, a mortgage were you just pay the interest. And the idea was that you would take out a separate investment vehicle, such as an endowment policy or pension to pay the balance back at the end of the mortgage term.
Whether there is going to be enough money to pay the capital balance will depend on the performance of your investment vehicle. During the 2000s some of these investments didn’t perform as well as expected and some borrowers were left with a shortfall. It is much less likely for lenders to offer an interest only product now, however, there are certain circumstances where this can be an option if you are going to downsize when you are older or have other investments what you will use to pay the capital back. Lenders are very strict when it comes to offering these products now and the loan to values are a lot lower than back in the day.
With an offset mortgage, the lender will set you up a savings account to go alongside your mortgage account. How this works is that let’s say you have a mortgage balance of £100,000 and £20,000 is deposited into your savings account, you only pay interest on the difference, so in this case £80,000. This can be a very efficient way of managing your money, especially if you are a higher rate taxpayer. This also is a way of reducing the mortgage term because as that money is sitting in that savings account your mortgage term shrinks.
This mortgage option was popular in the late ’90s and early 2000s, it originated in Australia and became popular in the UK when introduced by lenders such as The Yorkshire Bank. Currently, this is not a very popular mortgage option, The reason for this is that people don’t save as much as they used to anymore, however in the right circumstances an offset can be the perfect solution.