8 Types of Mortgages to Take Note Of: Which One Is the Best for Your Needs?

One can easily get confused by the different types of mortgages available today, and in the midst of that confusion, you may not choose the right one that suits your needs. Each of these types of mortgages comes with its own unique advantages and disadvantages, depending on your circumstance. If you are confused about making the final choice, you should consider talking to a financial advisor instead of gambling. The following are the commonest types of mortgages around today;

The Fixed-rate mortgages

The fixed rate mortgage seems to be one of the best options for prospective homebuyers who are scared of extremely high rates. The interest rates on Fixed rate mortgage does not change throughout its duration. One benefit of taking this mortgage type is that it gives you a peace of mind knowing that your monthly payment remains unchanged. The main disadvantage is that the fixed rate is normally higher than interests on variable mortgage types and if the interest rates fall, it wouldn’t affect your fixed rates. You have to stick to the length of the mortgage payment, leaving this type of mortgage early will attract some fees.

The Variable rate mortgages

The main feature of the variable mortgage type is that its interest rate is not fixed, hence it changes from time to time. The main benefit of having a variable mortgage is that its interest rates are not as high as fixed mortgages hence you can save more money but the problem here is that you may be required to make a higher down-payment, especially if you are buying a home for the first time. You need to set aside a substantial amount of income so that you can still afford your rent in times when interest rates increase sharply. You can read more here on Variable rate mortgages.

The Standard variable rate mortgage (SVR).

The standard variable rate has some element of fixed rate mortgage, as a matter of fact, you will begin the mortgage with a fixed rate and after an agreed term you start paying variable rates. It is usually the variable interest rate normally used as a benchmark from which subsequent loan interests are calculated. It normally comes with higher interest rates. Unlike other types of mortgages, your bank may not use factors or indices used in calculating interest rates here especially when adjusting the variable rates, and that makes it quite risky for most budget-conscious homeowners. You should not go for this type of mortgage especially if you are buying a home for the first time.

The discount rate mortgage

This is a special type of variable rate mortgage whereby the bank provides discounts on some of your payable interest rates. The downside of this type of mortgage is that the discount only comes as an introductory package, usually between 2 and 3 years. Very few banks offer a lifetime or extended duration of discounts on interest rates.

Just like the standard variable rate, your payable interest can go up or down. Once the introductory discount period has ended, you will likely be switched back to the standard variable rate mortgage type. The interest rates are generally lower under this mortgage type, likewise, your mortgage payments will be lower. The discounted rates here can have some quite lower mortgage fees when compared to a fixed rate or tracker mortgage type. One of the disadvantages of this type of mortgage is that early completion of mortgage payment or opting out of the plan may attract significantly high charges.

The tracker mortgages

The tracker mortgage is another form of a variable mortgage. The main difference between tracker and other variable rates mortgages is that tracker mortgage is that payable rates are tuned to the trend of other rates, especially the base rate being monitored by the bank. In most cases, tracker rates are usually higher than the rates they are tracking. If for instance, if there is a base rate +1% on your tracker mortgage and the base rate is 1.25%, then you will likely pay a tracker rate of 2.25%. It should be noted that the long-term tracker mortgages usually have wider margins hence it does not make financial sense if you choose long-term tracker mortgage rate type, though an introductory tracker rate mortgage may still make some sense.

The main benefit of the tracker mortgage is that your mortgage rent will fall if the rate it is tracking falls and it is obvious that one disadvantage of this mortgage type is that your mortgage rent will increase if the rate it is tracking also increases. In case you want to switch to another mortgage plan before your tracker mortgage agreement, ends, you will have to pay certain charges.

The capped rate mortgages

Capped rate are some forms of variable mortgages but the main difference is that they have a ceiling for payable interest rates, which means their interests cannot surpass a certain threshold. Like many other variable rate mortgages, the capped rate usually come as an introductory mortgage arrangement and that can vary from between 2 and 5 years. Interestingly, capped rate mortgages are the rarest of all mortgage types you can find today.

Aside from the fixed rate, the capped rate is the only variable mortgage that ensures that mortgage payments do go above a certain amount, and when the rates are going down, your mortgage rent payments will also go down. Keep in mind that once your introductory capped rate tenure has come to an end, your mortgage plan will return to your lender’s Standard variable rate.

Offset mortgages

Offset mortgages are one of the best possible ways of saving money on your mortgage payments because you can link it to your savings account, these mortgage loans can help you reduce the term to complete the payment and can also help you reduce your monthly payment on the long-term.

Many people are unaware of the existence of these types of mortgages, hence they are missing out on the opportunity to save thousands of dollars on regular basis. Once the offset mortgage has allowed you to link your mortgage to your savings account, the balance on your savings will be used in offsetting the interest that is charged on your regular monthly payment.

This means that you will pay the interest on your mortgage balance minus the money in your savings account. The benefit of this mortgage plan is that you wouldn’t get your mortgage deducted from your savings. You can also shorten the length of your mortgage payment without your monthly mortgage rent changing.

The Buy-to-let Mortgage

The buy to let mortgage is a special type of mortgage that is designed for homeowners who want to rent out part or the entire home. All you need to present to get this mortgage is a credit rating that is good and an initial deposit that is higher than most other types of residential mortgages. This mortgage will be offered to you on the agreement that you or any of your family member will not be living in the home. In most cases, you will not be allowed to move into the property even if you can’t sell it or rent it out. In some cases, some mortgage loan givers may allow you to switch from a residential mortgage to this buy-to-let type of mortgage and you will need a special mortgage loan from the onset.

One of the advantages of this type of mortgage is that you will get a percentage cut from the rent being paid by the occupants, this could vary from 5-10% and the house will automatically become yours when the mortgage tenure has expired.

Most first-time home buyers do not qualify for this type of mortgage, except you have a significant amount of money to purchase the property outrightly or at least make a huge down payment in the beginning.

Conclusion

When it comes to choosing the ideal mortgage type for yourself, there are several things to consider. For instance, you need to be aware of your credit rating- the better your credit rating the higher your chances of getting better deals on your mortgage lending. Those with higher credit scores are able to secure lower interest mortgage loans.

You may want to pay off as much debt as you can off your credit card and if possible cancel such credit card once the debt payment is completed. Most of the mortgage loan providers will consider your credit rating score, alongside your current expenses, before they can decide to give you a loan. Secondly, it pays to make a very good down-payment of your mortgage upfront. An ideal upfront payment of 20% or more will usually make your mortgage repayment term shorter.

From specialist reports, it seems the fixed rate mortgage types, capped rate and offset variable rate mortgage types are the most suitable for budget-conscious first-time home buyers and those who want to avoid the payment of exorbitant interest rates plus hidden charges. It is quite important to seek the opinion of a financial advisor before making the final choice.

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