Mortgages: What You Need to Know
In order to purchase a home or tap into its existing equity, a mortgage is often required. The basic principle behind a mortgage is that you will be provided with money (from a bank or lender) at a certain rate for a certain period of time. In return, you agree to pay this sum back at regular intervals (with interest included). In essence, your home acts as the collateral for borrowing money. The value of the mortgage will depend upon the inherent value of the property as well as your credit history. Let's take a look at the two main variants of mortgages as well as some factors to take into account when applying.
Fixed Rate Mortgages
In this case, the name says it all. A fixed rate mortgage will provide you with the same rates for a predetermined period of time. This can offer an extra level of security if you hope to reign in expenses while knowing exactly how much you will owe. However, there is a downside to note here. All interest rates are set by the Bank of England. Just as these rates can rise, they will also fall (as we have seen happen over the last few years). If you remain within a fixed mortgage, you could very well be paying more than the predominant interest rate. Fixed rate mortgages are usually sold in either two-or five-year plans.
Variable Rate Mortgages
Standard Variable Rate mortgages (SVRs) are associated with interest rates that can fluctuate. Nearly all mortgages will fall into this category after the initial fixed rate plan expires. As you may imagine, the benefit with this option is that falling interest rates can save you a great deal of money over time. However, the converse is also true (as mentioned above). It should be highlighted that SVR mortgages tend to be associated with slightly cheaper deals overall when compared with fixed rate plans.
Factors to Address When Dealing with a Lender
The first thing to take into account will naturally revolve around the interest rates. If you choose a fixed plan, see what other fees are associated with the mortgage. Should you choose a standard variable rate mortgage, speak with a financial advisor and determine the outlook for interest rates into the future. Should they be predicted to call, an SVR could be a wise choice. Some other concerns can be:
- The specific terms and conditions of the lender.
- Early termination fees if you choose to break the contract
- The ability to link your savings account to your mortgage for easy payments (known as an offset mortgage).
- The realistic probability of being able to make the scheduled payments for the lifetime of the plan.
Taking out a mortgage is an important financial decision that can affect you for years to come. So, it is always a good idea to keep all of these details in mind well before applying for such a useful financial vehicle.