For most of us, buying a home involves securing a mortgage. The last thing you need is the mortgage process adding pressure to what can already be a stressful experience.
That is why our team of expert mortgage advisers at PIL (Protection & Investment Ltd) Southampton feels passionately about using our extensive experience to help you navigate the wide range of options available.
You may only go through the mortgage application a handful of times in your lifetime.
We, on the other hand, are working on mortgage applications every day. Scouring the marketplace to keep up to date on all the providers’ mortgage products and their associated terms and conditions.
All of which makes us well placed to help you to find the best deal to suit your circumstances.
In this article, we talk through the main types of mortgage available: Interest Only, Repayment, Variable Rate and Fixed Term. We cover their key differences and the potential pros and cons.
Everyone’s circumstances are unique. It is our job, at PIL Southampton, to get to know you and to ask the right questions so that we can help you to work out the best option for you. Not just for now, but for the future.
Unlike a repayment mortgage, with an interest-only mortgage your monthly mortgage payments only cover the interest on the loan, not the loan itself (the principal amount).
This arrangement could be for the whole duration of the mortgage but it is more likely to be for the first 7-10 years of the mortgage term, after which you will start to pay off the principal loan as well as continue to pay the interest on that loan.
Only paying the interest makes the monthly mortgage payment attractively lower BUT you generally pay a higher interest rate on an interest-only mortgage, which means that overall, in the long term, you will be paying more money back to the lender.
Also, as you are only paying the interest on the mortgage and not the principal amount, you have to make sure that you have robust plans in place for when your mortgage term is up and it is time to repay, in full, the principal amount of the loan.
When this time comes, some people choose to sell the home they have mortgaged, to release capital and pay off the outstanding mortgage. This is quite common in buy-to-let scenarios. Others choose to re-finance their loan after the interest-only term period has expired.
Another option is to pay off the principal loan with a lump sum, if you have been able to save and/or invest money in other ways during your interest-only mortgage term.
Typically, lenders require you to provide a higher deposit for an interest-only mortgage, and for you to have a higher income than if they were lending for a repayment mortgage.
A repayment mortgage is the most common type of mortgage. It means that you repay part of the mortgage loan and the interest on that loan at the same time, in your monthly mortgage payments.
This is fundamentally different to the interest-only type of mortgage, where you are only paying the interest on the loan, not the principal part of the loan itself.
With a repayment mortgage, because you are paying off the capital part of the loan every month, your monthly repayments decrease over the length of your mortgage term. This is because, as the principal amount reduces, the interest will continually be recalculated to the lower capital amount.
With a variable rate mortgage, the interest rate and therefore your monthly repayment can change at any time.
It can be a tracker mortgage, which tracks the Bank of England’s base rate, for example if the Bank of England’s base rate increases or decreases by 1%, so too will your monthly repayment.
A standard variable rate mortgage works in the same way, except the interest rate is tracking the lender’s own interest rate. Usually, lenders change their rate in line with the Bank of England, but they don’t have to. So, in theory, your standard variable rate mortgage rate could change at any time.
A fixed-rate mortgage means that the interest rate will be the same throughout its term, so your monthly repayments will be guaranteed not to change. The term of a fixed-rate mortgage is usually two years, three years or five years.
How PIL Southampton can help you
Our priority is to use our extensive experience and knowledge to ease this potentially complex process for our customers, and we pride ourselves on securing the best deals we can for our hundreds of satisfied clients. We would love to help you in the same way!
How you can contact PIL Southampton
Our friendly, knowledgeable mortgage advisers are here to guide you through the mortgage process, minimising the stress from start to end. You can email us, fill out the contact form on our website or call us on 02380 668407.