A mortgage is likely to be the single largest financial commitment you ever make. There’s a wide range of mortgage products out there, with varying interest rates and repayment options available.
In the past, some people were allowed to take out mortgages they couldn’t afford. This meant they fell behind with payments or lost their homes.
The Financial Conduct Authority (FCA), the financial services industry regulator, has set out a new set of rules for mortgage advisers like us, and lenders, to improve the process of getting a mortgage, and prevent these past problems.
Under the new rules, which came into force on 26 April 2014, your lender must check that you can afford your repayments now and in the future. To do this they will need information about your income and outgoings. You will have to tell them if you expect your income and outgoings to change in a way that means you’ll have less to a spend on your mortgage payments.
You will also need to give your mortgage lender evidence of your income.
Before you choose a specific deal, you may want to understand more about what types of mortgage are available.
This brief summary may help.
Common types of Mortgage
- Variable rate –Your monthly payment fluctuates in line with a Standard Variable Rate (SVR) of interest, set by the lender. You probably won’t get penalised if you decide to change lenders and you may be able to repay additional amounts without penalty too. Many lenders won’t offer their standard variable rate to new borrowers.
- Tracker rate –Your monthly payment fluctuates in line with a rate that’s equal to, higher, or lower than a chosen Base Rate (usually the Bank of England Base Rate). The rate charged on the mortgage ‘tracks’ that rate, usually for a set period of two to three years. You may have to pay a penalty to leave your lender, especially during the tracker period. A tracker may suit you if you can afford to pay more when interest rates go up – and you’ll benefit when they go down. It’s not a good choice if your budget won’t stretch to higher monthly payments.
- Fixed rate –The rate stays the same, so your payments are set at a certain level for an agreed period. At the end of that period, the lender will usually switch you onto its SVR (see Variable rate). You may have to pay a penalty to leave your lender, especially during the fixed rate period. A fixed rate mortgage makes budgeting much easier because your payments will stay the same – even if interest rates go up. However, it also means you won’t benefit if rates go down.
- Discounted rate –Like a variable rate mortgage, your monthly payments can go up or down. However, you’ll get a discount on the lender’s SVR for a set period of time, after which you’ll usually switch to the full SVR. Discounted rate mortgages can give you a gentler start to your mortgage, at a time when money may be tight. However, you must be confident you can afford the payments when the discount ends and the rate increases
To discuss your options contact us today and one of our advisors will be happy to help.