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Given that a mortgage is likely to be the most expensive financial commitment in a consumer’s lifetime, it is worth researching. There are many mortgages and loans available – providing a huge range of options and choices, from each of the major lenders. Natwest for example currently offers a range of eight mortgages and six loans so the consumer must decide whether they want to take on a repayment mortgage or an interest-only mortgage at the onset.
Repayment mortgages tend to have a higher premium, but they are arranged so that the consumer’s repayments do affect the amount borrowed, effectively eating away at the lump sum. Interest-only mortgages come at a lower price, but are designed so that the consumer’s repayments only cover the cost of the borrowing i.e. the interest.
At the end of the agreed contract, which is usually 25 years, the consumer may have paid off the interest, but will still then have to pay off the actual amount borrowed.
These two types of mortgage can then be sub-divided into other categories.
The most common is the Standard Variable Rate mortgage. In essence, the interest set on this type of mortgage follows the rate of interest that is set by the Bank of England. As this ‘base rate’ increases or decreases, the interest rate on Standard Variable Rate mortgages follows loosely in step.
By contrast, the interest rates set by a Tracker mortgage will follow the Bank of England’s base rate entirely - which is good for the consumer if the base rate decreases, but unfortunate if the opposite occurs.
| Historical Quote |
The sun was shining on the sea,
Shining with all his might:
He did his very best to make
The billows smooth and bright—
And this was odd, because it was
The middle of the night.
The moon was shining sulkily,
Because she thought the sun
Had got no business to be there
After the day was done—
“It’s very rude of him,” she said,
“To come and spoil the fun!”
| —Lewis Carroll [Charles Lutwidge Dodgson] (1832–1898) |
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Capped mortgages fix an uppermost level of interest that is payable. As this kind of mortgage follows the Bank of England’s base rate, this can be beneficial if the base rate increases beyond that fixed level, as the consumer’s repayments will not reflect that increase.
A Current Account Mortgage combines the mortgage with a consumer’s bank account. This is useful only if the consumer is very money-minded or if their outgoings are less than their salary. If this is the case, the mortgage can be paid off relatively quickly.
Offset mortgages work on a similar principle, although the mortgage and the current account are not combined. The consumer’s savings are used to offset part of the cost of the mortgage. As with the previous one, this is only for the very money-minded or those with an income that exceeds their monthly outlay.
Self Certification Mortgages are useful for people who have no way of proving their income. The applicant is asked to assess his or her own potential yearly income and a loan is made that correlates with that.
However, as there is considerable risk to the lender, the repayments are often quite high and the amount available to borrow can be comparatively low. These can be difficult mortgages to attain, as there has been much fraud involved with them in the past, with consumers exaggerating their incomes and soon failing to make repayments. Fraud of this nature constitutes a criminal offence.
Consumers are best advised to use a mortgage broker that is regulated by the FSA, or a reputable website such as beatthatquote.com which helps users to compare mortgages and loans and to find them the best deal available. This can be preferable to speaking to banks or building societies that try to sell their own mortgage products. These tend to be very uncompetitive, compared with companies who deal solely in mortgage lending.
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