If you are looking to take your first step onto the property ladder, what type of mortgage is right for you should be one of your first priorities as a future homeowner. But if you are flying the nest for the first time, are waving goodbye to renting, or are unfamiliar with the process of applying for a mortgage, there are several factors you must consider beforehand. Continue reading to find out what they are and how they can streamline the entire process from start to finish.
When it comes to choosing what type of mortgage is right for you, you may consider a repayment mortgage. This is, in the simplest of terms, a mortgage in which your monthly payments are made up of interest in addition to a portion of the initial amount borrowed. As you pay off your mortgage in monthly installments, the interest decreases over time, and your mortgage is gradually cleared.
If you are a first-time buyer, this is the option that is likely to be offered to you by the vast majority of lenders. By opting for a repayment mortgage, the property you have mortgaged will be yours as the term, which usually lasts 25 years, comes to an end.
As well as a repayment mortgage, an interest-only mortgage may also be an option for you. There are several differences between a repayment mortgage and an interest-only mortgage. With an interest-only mortgage, your monthly payments will be significantly lower as they only cover the interest on the mortgage itself.
It may sound like a better deal, but the vast majority of lenders will only offer you an interest-only mortgage if you can prove in one way or another that you can pay off the loan with existing savings, investments, or assets. This is one of the main reasons why repayment of mortgages tends to be the first option offered to first-time buyers. It is worth noting, however, that a number of buys to let mortgages are only available as interest-only.
As well as deciding between a repayment mortgage and an interest-only mortgage, you must also decide between a fixed rate and a variable rate. By taking a mortgage with a fixed rate, your monthly payments will remain largely unchanged for the entire duration of your mortgage term.
As a result, you are unlikely to benefit from falling interest rates but can relax safe in the knowledge that you are also unlikely to find yourself affected by rising interest rates. As they are relatively simple to understand and do not tend to differ from lender to lender, they are a common choice for a growing number of first-time homeowners.
If a fixed rate mortgage doesn’t suit you, a variable rate mortgage may be a viable option. A variable rate mortgage, which can include discount and tracker mortgages, can, however, fluctuate at a moment’s notice and in line with changes to base rates in whichever country you are residing in. If you are considering a variable rate mortgage, it may benefit you to research whether or not rates are likely to change in the not-so-distant future or over the course of your mortgage term in the long run.
One of the main advantages of a variable rate mortgage is the possibility of ending up with a low rate and, therefore, low monthly payments. By agreeing to take on the risk of interest rates rising in the future, your lender may also reward you with a lower rate for the first couple of months of your mortgage term.
When it comes to deciding what type of mortgage is right for you, you must familiarise yourself with upfront and hidden mortgage fees. For example, a mortgage may benefit from low-interest rates but require a hefty set-up fee that may not necessarily be outlined by your lender initially. This is why it is important to ask as many questions as you possibly can from the very onset and throughout and do your research before you agree to a particular mortgage and sign on the dotted line.
If you are considering applying for a mortgage in the not-so-distant future, there are a number of factors you must consider beforehand. This includes deciding between a repayment or interest-only mortgage, opting for a fixed rate or a variable rate mortgage, and researching upfront and hidden mortgage fees. By doing so, you can streamline the entire process from start to finish and find your forever home for less.