While the internet continues to touch our daily lives more and more there are few sectors where the impact has been so pronounced than the financial sector.  The opening up of a whole new communication channel has given the consumer more information, more help and more offers to consider, but it can be too much for some people.  Mortgages can often be one area of finance which are a lot simpler than first impressions imply.  Its simple, work out what you can afford, how you want to pay, and find the best offer around - if only it were that easy.  Let us consider the different types of mortgages available :-

 

Repayment Mortgages

Even though there is now a vast array of different types of mortgage on offer, the traditional repayment mortgage is still one of the more popular of today.  It also happens to be one of the “safest” options for those who can afford the higher payments in the early years, payments which will fall as the mortgage reaches full term.

Repayment mortgages require a regular payment to be made on a regular basis (normally monthly), with the payment being split between paying off the initial capital and also the interest charged on that capital.  As the mortgage progresses the interest payments will reduce (if interest rates remain constant) as the amount of initial capital to be repaid is reduced. 

Interest Only Mortgages

These are as popular as repayment mortgages, but for many they have proved to have a very nasty sting in the tail.  This mortgage requires the ongoing payment of interest only, thereby reducing the monthly outgoings of the customer.  However, a mortgage company will also require some kind of investment plan to be taken out to cover the repayment of the initial capital at the end of the life of the mortgage. 

Investment plans may include ISA’s, pension plans, etc but the problem is that there is no guarantee that the investment plan will be sufficient to cover the repayment of the initial capital - leaving the customer to make up any short fall.

Variable Rates

The rate at which interest is paid on any mortgage is in some way linked to base rates at the time, and is likely to vary significantly over the period of the mortgage.  Variable rates are the purest form of mortgages, with the rate of interest heavily linked to the prevailing base rates at the time. 

When you consider an example where base rates may vary between say 2% and 8% over a few years,  the monthly payment may vary significantly over the length of the arrangement.

Fixed Rates

The fixed rate mortgages is becoming more and more popular, with many customers looking at payment rates which will stay constant for a set period.  This constant payment allows many to budget their everyday spending, knowing that there payments will remain constant (for a set period at least). 

The government have recently been highlighting the potential for full term fixed mortgages, which are very popular in the  US.  These allow the rate of interest to be fixed for the entire length of the mortgage agreement.  Quite why these agreements have not really taken off in the UK is a little puzzling.

Discounted Rates

While discounted rates very often grab the headlines, they can be the more risky of the options for many.  An attractive initial rate, fixed for say a period of 2 years, can often lull people into a false sense of financial well being.  Many customers get used to the discounted payments, only to find they cannot afford the standard variable rate, after the discount period is over. 

If base rates have risen in the discounted period, there may be an even bigger shock for the customer when leaving the discounted rate.

Stepped Rates

The stepped rate offer can again look very attractive on the surface, but depending upon how interest rates move, it can end up fairly expensive.  There will be an initial period of a low rate, say for example 1.99% fixed for two years, at which point the rate will then step up to a new level, agreed in advance, say 6.99% for the remainder of the mortgage.  The “stepped” rate will obviously be fixed to take into account the interest rate at the time, and forecasts for the future. 

Once a stepped rate agreement has been signed it can be very costly to escape, with large exit fees a familiar characteristic of such agreements.

Offset Mortgages

Offset mortgages are only really available to those who have substantial savings, but do not wish to commit them to any investment or spending.  In effect your mortgage will be added to your bank account (i.e. resulting in a debit balance) and all of your income will be paid into this account. 

An agreed minimum payment must be made each month, although as you are using your funds (income and savings) to offset the overall balance on the mortgage, there are potentially large interest payment savings to be made.  Even though the majority of your monthly income will not be in at the end of the month, each day it remains in the account will help to reduce the interest rate burden.

These are just a few of the more popular mortgage arrangements currently available on the market, a market which while ever more transparent due to the internet, can still be a minefield for many.

How much can you borrow?

While the average borrowing ratio in the UK market is somewhere in the region of 2.25 - 2.75 times a joint income, there have been many instances of late where people have received mortgages valued upon 4 times their incomes (and more!).

It is not really a case of borrowing as much as you can, it is a case of borrowing only what you can afford to pay back.  Do not be influenced by the recent rise in property prices, as these increases can never be guaranteed.  It is essential that you treat a mortgage as a full term investment, rather than looking to buy a property and sell it on for a quick profit - this is not the way it works.