Which is the Right Mortgage Type?
Achieving the Best Mortgage Rate for First Time Buyers
Jan 5, 2009
With so many products on the market, it can be difficult to identify the right mortgage type. Achieving this is key to getting the best mortgage rate. Avoiding costly lessons can save a first-time buyer hundreds of pounds each month.
Standard Variable Rate Mortgage
Standard variable rate (SVR) mortgages move in-line with interest rate movements, although there is a 2% margin added. Borrowers generally go onto standard variable rate when a mortgage term ends. It is possible to enter a new agreement without early redemption penalty when on SVR.
Discount Mortgage
A discount mortgage offers a percentage discount below standard variable rate for a fixed period. This can prove useful when a first-time buyer is starting out in their career and income progression is likely. Discount mortgages also leave the borrower with additional money to buy household possessions.
Tracker Mortgage
The tracker mortgage is similar to a standard variable rate mortgage in the sense that they move in-line with interest rate fluctuations. However, a tracker mortgage more closely mirrors the Bank of England base rate. They tend to be favoured by first-time buyers who expect rates to fall from higher levels.
Fixed-Rate Mortgage
A fixed-rate mortgage permits a first-time borrower to fix the rate of interest at a specific level. Fixed rate mortgages are most beneficial to first-time buyers who feel that rates are likely to go up. They provide certainty for those on fixed incomes.
Offset Mortgage
An offset mortgage allows a borrower to offset savings against the amount borrowed. This can help to reduce the mortgage term considerably as less interest is paid. However, the added flexibility offered usually results in most lenders charging a higher rate of interest.
Interest-Only Mortgage
An interest-only mortgage involves making repayments that only cover the interest that has accrued. It is necessary to use an alternative repayment vehicle, such as a Cash ISA, to cover the capital borrowed at the end of the term.
An interest-only mortgage can be helpful to a first-time buyer or a buy-to-let property investor as it minimises monthly repayments. Buy-to-let investors usually seek capital growth and first-time buyers benefit from lower interest rates when starting out in life.
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, said: "Interest rate cuts and falls in interbank lending have not yet encouraged activity to rise in the UK mortgage market. First-time buyers and homeowners alike are still struggling to buy a property as banks are still requesting sizeable deposits, further stagnating the property market."
Those wishing to buy are going to require higher deposits. First-time buyers and those seeking bad credit mortgages can benefit considerably from the advice of a mortgage broker. There are numerous pitfalls and choosing the right mortgage type can help save thousands of pounds.
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