For most people, the only way to make buying a house feasible is through a mortgage. There aren’t many that can afford just to pay for a house up front. It’s far more likely that they will need to gather a deposit together and find a lender to provide them with a mortgage.
They’re not always the easiest thing to get your head around, though. There are many different variables that can leave your head spinning. We’re here to put you straight and make understanding mortgages a little bit easier. Many people make the mistakes of focusing on the interest rates offered, but as we’ll discuss later, that’s a mistake.
There are two main types of mortgages, and both of them have their own set of pros and cons. Let’s explore them both, so you can ultimately make a decision on which one suits you best.
Fixed Rate Mortgage
This is perhaps the most common mortgage option, and the reason is obvious. People fear uncertainty. A fixed rate, for the most part, eliminates the risk of your interest fluctuating. No matter what happens in the financial market, your interest rate will remain the same for the length of the deal. There are some exceptions, though, where the fixed rate will only apply for a specified period of time.
The clear benefit of this is that you won’t be stung by a sudden surge in interest rates. You’ll know how much you’re going to be paying in addition to your loan for the length of the deal. There are, however, a couple of disadvantages. Banks knows that people are seeking fixed rate mortgages as a means of reassurance, so they jack up the prices. So, it’s worth shopping around. Take a look at the mortgage rates at CalMtg.com. You’ll also miss out should interest rates suddenly plummet. Such is the gamble of a fixed rate.
Variable Rate Mortgage
If you like to live life on the edge, a variable rate mortgage could be for you. The interest rate could fluctuate (or, likewise, rapidly decrease) at a moment’s notice. This can make things hard to plan for. You’ll never know when you might need to dip into your savings. There, is, however, a considerable chance that your interest rates will drop, and you’ll pay less. It’s down to you to work out if that’s a risk worth taking.
One particular benefit is that there is no penalty for overpaying. With fixed rate mortgages, your bank may charge you for paying above the minimum repayment threshold. Seems silly, doesn’t it? But there’s a method behind the madness. The bank wants to prolong the length of the mortgage so that you rack up more interest. That is no longer a problem with most variable rate mortgages.
Whichever you decide works best for you and your family, there will be other variables to consider. Some banks offer discounts, offset loans and capped rate mortgages. Most of them fall under the variable rate mortgage, but could provide you with additional bonuses. Take a look at what different banks can offer you before making a decision.