How do mortgages work?
Most people who purchase a home do it by taking out a mortgage. A mortgage can be defined as a long-term loan, as many have a payback period of up to 30 years. It is important to keep in mind that the mortgage is secured against the home or property you are going to buy. This means that when you are unable to pay your mortgage, the bank or lending institution will re-possess your home. Because of this, it is important to not only keep payments up-to-date, but also to purchase mortgage insurance, which will cover your repayments if some unforeseen circumstance occurs. Our mortgage checker will help you find the best, low-interest deals available.
Who offers mortgages?
Nowadays, there is a range of financial institutions that offer mortgages. These include traditional banks and building societies and specialist lenders that only offer mortgages. There is no way to say which institution will offer the best deals but, as a rule of thumb, it is always good to start by approaching your own bank or building society first. Because taking out a mortgage is a big financial commitment, it is important to shop around to make sure that you get the package that best suits your financial needs.
What types of mortgages are there?
As there are many types of mortgages on offer, it is important to seek professional advice before deciding which mortgage to take out. It may make sense to seek impartial advice from a financial advisor or a public financial advice bureau.
Although there is a large number of different mortgages, most are basically permutations on two general types: fixed-rate mortgages and variable-rate mortgages. Each financial institution will have their own line-up of mortgage products, but all will be based on these two basic types.
A fixed-rate mortgage means that the interest rate of the repayments is fixed throughout the term of the mortgage. A variable-rate mortgage, also known as floating-rate mortgage, is the opposite. The interest rate of the mortgage changes depending on market interest rates. This means that your monthly mortgage payments can go up or down, depending on financial markets.
Fixed vs. variable – which is better?
There is no way to say which is better, a fixed or variable-rate mortgage, as both have their advantages and disadvantages. For example, in a very high interest-rate environment, it might make sense to take out a variable-rate mortgage, as rates may decline. When interest rates are low, it may make sense to get a fixed-rate mortgage, as rates might increase in the future.
However, generally speaking, variable-rate mortgages are considered to be less costly because, from the financial institution’s point of view, the borrower is taking the risk on the loan. This means that the financial institution can pass the cost or risk of interest rates fluctuating on to the borrower. Because of this, variable-rate mortgages may initially offer very competitive interest rates when compared to fixed-rate mortgages. A financial advisor can check the market and tell you which type of mortgage best suits your needs.