I’m in the market to buy my first home but I’m not sure where to start. My parents recommend a fixed rate mortgage because that’s what they have, but I read that tracker mortgages can be better because they can be less than fixed rate mortgages. What would you recommend?
– First-time Buyer
First, congratulations on getting into the housing market!
You’re embarking on one of the most challenging, exciting and rewarding experiences of your life. I hope you’ve paused to give yourself a pat on the back, because being in a position to buy a home in today’s market is no small feat.
Second, how long is a piece of string?
When it comes to mortgages, it’s impossible to issue a blanket statement that one type or term length is better than another. Rather than asking “what kind of mortgage is the best kind”, you should ask “what type of mortgage will help me reach my own goals?”.
Without knowing more about you – and without being in a regulated advice environment! – I can’t give more specific advice than that.
However, we can look at common types of mortgages and consider a few prompts to help you decide what is best for you.
A mortgage for every kind of buyer
There are many different kinds of mortgages out there designed to meet the needs of different kinds of buyers.
The standard type of mortgage you’re probably most familiar with is a repayment mortgage. This means that monthly, you’ll make repayments that go toward both your principal loan amount and the interest you’ll have to pay. This ensures that by the end of your term, your whole loan will be paid off and you’ll own all of the equity in your home.
An interest-only mortgage means you’ll repay only the interest on your loan each month. This can keep your monthly payments lower, but it means you’ll have to pay for the entire capital loan amount at the end of your term. For example, if you borrow £250,000, you might only pay £450 per month in mortgage payments, but when you sell or remortgage away, you’d have to pay that £250,000 back all at once. These are less popular.
Then there’s a buy-to-let mortgage, which landlords use to purchase homes they’ll rent out to tenants. These mortgages can have different criteria and rates than mortgages for a home you’ll live in yourself.
There are also mortgages tailored to meet the needs of certain religions. For example, according to Sharia law, Muslims aren’t allowed to take out loans that accrue interest. That’s why Islamic mortgages don’t charge interest monthly – instead, the total interest payable over the entire term of a mortgage is calculated and added to the principal loan amount up front. This makes it possible for Muslim people to get mortgages without going against their religious beliefs.
Then, there are variations in the types of interest rates you might pay.
Choosing the right rate
If you pay interest on your mortgage, you can usually choose between a rate that stays constant for your entire mortgage or one that can change. Both come with advantages and disadvantages.
A fixed rate mortgage means your interest rate doesn’t change. You select a rate when you get your mortgage offer and it won’t change until the end of that interest term. Sometimes, fixed rates can be a bit higher than rates that go up or down – but the certainty can make it much easier to plan and budget for your expenses.
Conversely, variable rate and tracker mortgages can go up or down. A variable rate mortgage can float up and down, changing each month. A tracker mortgage is based on a set rate, usually the Bank of England’s base rate. So if the Bank of England puts their rate up or down, you can expect to see the same movement in your mortgage payments.
Variable rate mortgages can bring lower rates than fixed mortgages – but they can also go up to be more than you’d estimated. Variable rates can also make it harder to budget, because you don’t know for sure what your rate will be in the future.
Your term on your terms
And then there’s the question of the term. 2 years? 3 years? 5 years, 10 years? Again, the right mortgage term is totally specific to you. In each case, the number of years dictates how long you’ll be under contract at a specific rate.
For example, a 2-year variable mortgage means you’ll be locked in to a floating interest rate for the entirety of the 2 years, and then you’ll be able to either switch to a new rate or remortgage. If you remortgage or sell before those 2 years are up, you’ll probably have to pay early repayment charges.
So when you’re choosing the length of your interest rate period, think about where you’ll be in the future.
If rates are low and you’re happy in your home, you might choose to lock in a 5-year rate.
If you’re not sure about your plans for the future, you might choose a 2-year rate for more flexibility.
Choosing the right mortgage for you isn’t as daunting as it seems.
And if rates are high, you might also opt for a 2-year rate with the hopes that rates will be lower when it comes time to remortgage. Again, I can’t choose for you – but choosing the right mortgage for you isn’t as daunting as it seems.
Just think about what you can afford and your own personal goals to inform your choice.
And you can always get an expert opinion to help.
Before you get a mortgage with Gen H, for example, you’ll get free regulated mortgage advice from the mortgage experts on my team. And you can always use a broker if you’d like to get advice on the whole market.
The kind of mortgage you choose is so specific to you and your goals. This can make it seem like a big, scary choice.
But have a think about what matters to you and where you’d like to be in a few years – the right choice is probably right in front of you.