If you want to scan the market yourself, you can do some quick calculations to ensure that you are getting a good deal. Do bear in mind, however, that if you switch your mortgage before the end of your current deal, then you might have to pay an early repayment charge which can be substantial - often 2 to 5% of your loan. In addition, there is usually an exit fee which is often referred to as an 'admin fee.’ It’s important to time any change to coincide with the point at which the initial offer concludes. You should begin the search for a new lender at least three months before the end of the initial interest rate period. So the key message here is to do your sums before taking the plunge. If you're in any doubt, seek out the advice of a professional mortgage broker.
Fixed vs variable
There is a wide range of mortgage products on the market, from repayment mortgages to interest-only and fixed-rate mortgages. Then there are the more flexible variable rate mortgages and tracker mortgages, as well as discounted rate and capped rate mortgages, offset and buy to let. This can seem something of a maze to navigate around, but with the right advice, you can be sure you are making the right decision.
Repayment mortgages
Repayment mortgages involve monthly payments comprising an interest element plus some of the capital you've borrowed. At the end of the term, usually 25 to 30 years, you will own your home outright. If you move house before the 25 to 30 year period ends, you might be able to 'port' the mortgage to your new home, or alternatively, you can repay it in full and take out a new one. This is ideal for homeowners who want to ensure their home is paid for at the end of the term.
Interest only mortgages
How does remortgaging work in this case? You pay just the interest month by month and then repay the capital at the end of the period using money you've saved elsewhere. You can save any way you wish, but it’s essential that you have this capital at hand for the lender at the end of the period. If you don't, you may have to sell your home. Before approving an interest-only mortgage, the lender may ask you to demonstrate how you intend to pay off the loan. The main advantage here is that the monthly repayments will be a lot lower. However, if you find this is not the loan for you, you may be eligible to move to a repayment mortgage. As ever, the expert opinion of a broker may prove valuable.
Fixed rate mortgages
Fixed rate mortgages are a popular choice, especially with first-time buyers who want the security of a fixed payment for an agreed period of time. This means the monthly outgoing will be the same for the 2 - 5 years as secured in the initial product, or in some cases, 10 years. The down side is that you will be tied into this higher payment if other rates go down. It may be possible to get out of a fixed rate contract, but there will be an early repayment charge. This option is good for buyers who are keen to budget.
Variable rate mortgages
A standard variable rate is the interest rate that all borrowers will go onto after completing any introductory period with a fixed, tracker or discounted option. Some lenders will also permit you to take out a new mortgage on their standard variable rate. This figure is partly influenced by the Bank of England base rate, but other factors are taken into consideration as well. This may be an attractive option for buyers who think interest rates are likely to go down.
Tracker mortgages
Tracker mortgages fluctuate in line with the Bank of England base rate. The actual rate you will pay will usually be set above the base rate. When the base rate rises, the mortgage rate will also go up. It will also come down when base rate comes down. Often there's no limit as to how high it can go. This may be a good option for buyers who can afford to pay more if the rates do go up.
The good news is that if the value of your home has risen since you signed your mortgage deal, you could find you’re in a lower loan-to-value (LTV) category. This means that you could be eligible for a lower rate. Again, it’s essential to do the calculations or leave it to the professionals. Borrowers tend to end up paying a higher rate initially if they opt to fix their mortgage rate, as opposed to choosing a tracker. This can suit some homeowners as it gives added security and peace of mind, knowing exactly what the monthly payments will be for the next few years.
Those with a little more flexibility and more disposable income might prefer to opt for a variable rate. This may suit those who tend not to have to worry about budgeting. The variable rate option can offer lower monthly payments in the short term which is ideal for many. The main issue with base rate increases or decreases is that no one knows when or if they will be announced, so there is little point in trying to second guess the market.
The most important message here is that there is no right or wrong answer. It’s important to go with the option that best suits your personal circumstances and one with which you’re comfortable. If you are concerned that your mortgage payments may rise and become unaffordable, go for the security of a fix.