Mortgage news

There’s a lot to think about when buying a home. When choosing a mortgage, you need to consider payment options, interest rates, deposits, and potential benefits.

To help you get started, we’ve listed a few options you’ll need to think about below, highlighting the pros and cons of each. If you want to discuss any of them further, or if you’re ready to find the perfect mortgage for you, reach out to our award-winning mortgages team. We’re here to help you get your feet on or up the property ladder.

Payment options

Choosing the right repayment option for your mortgage is crucial. This will be what ensures your monthly mortgage costs are affordable, and help you meet your long-term homeownership goals.

Repayment

A repayment mortgage is a popular option where you pay back both the loan amount and the interest. As you pay back your loan, the value of it goes down and the equity you hold in your house goes up. Ultimately, you can pay off the mortgage in full and own the house outright if you choose to.   

Pros:

  • Ability to build up equity.
  • Have a greater chance of owning the house outright.  

Cons:

  • The monthly payments are usually higher than if you choose an interest-only mortgage.

Interest-only

An interest-only mortgage works by allowing you to pay only the loan’s interest. This is different from a repayment mortgage, where you need to cover both the interest and the loan amount. As a result, with an interest-only mortgage your monthly payments can be significantly lower.

With this type of mortgage, the overall loan amount won’t decrease. If you want to own the house at the end of the repayment period, you’ll need to have enough saved to pay off the mortgage in full.

Pros:

  • Cheaper monthly mortgage cost.

Cons:

  • Harder to own the house outright at the end of the repayment period.
  • Likely to be more expensive in the longer-term compared to a repayment mortgage.

Rate options

You’ve picked the repayment option that suits you. Now, it’s time to decide if you want a fixed or variable rate mortgage. 

Fixed rate

With a fixed rate mortgage, you tie into one rate of interest for a specific period. Several factors usually determine the rate you receive when you fix. The main one is the base rate set by the Bank of England. Usually, the higher the base rate, the more expensive it is to borrow.

Fixed rate terms can range from two to 10 years. By tying into a fixed rate, you’ll have one guaranteed mortgage cost every month for the length of your deal.

Be aware however, if the Bank of England’s rates improve during your term, you won’t be able to move your mortgage to a better deal without facing, usually quite large, early repayment charges.

Pros:

  • A fixed monthly outgoing, which can help with household budgeting.

Cons:

  • You can’t move onto a better deal until the end of your term unless you pay an early repayment charge.

Variable rate

Choosing a variable rate mortgage means that your monthly payments rise and fall depending on various factors. These factors are determined by which variable rate mortgage you choose. The two most common options are tracker and standard variable.  


Tracker

If you choose a tracker mortgage, your monthly payments will fluctuate depending on the Bank of England base rate. Your lender may also add an extra percentage rate to determine your overall payment.

When the economy is stable and interest rates are low, homeowners may find it appealing to choose this option. This is because their monthly mortgage payments will also be low.

However, during more difficult economic periods, monthly payments can skyrocket from one month to the next. Base rate is currently at 5.25%, if your lender chooses to charge base rate plus 1.5%, you will pay 6.75%. If the Monetary Policy Council chooses to increase base rate further to 5.5% in the future, you will then need to pay 7%.

Pros:

  • Tracker rates usually enable homeowners to overpay on their mortgage.
  • When external rates are lower, the mortgage repayments are lower.
  • If external rates begin to rise, you have the option to move to a fixed rate deal.

Cons:

  • Difficult to budget, as repayment costs may fluctuate.
  • Most tracker mortgages have a ‘floor’, meaning lenders won’t offer rates below a certain level, even if base rate is lower.

Standard Variable Rate (SVR)

You’ll usually move onto an SVR if your fixed term comes to an end, and you haven’t yet tied into a new deal. The lender sets the interest rate on SVRs, not the Bank of England base rate, unlike a tracker mortgage. However, the wider economy may influence the rate which lenders offer.

Pros:

  • You can usually overpay on your mortgage while on an SVR.
  • You may see a drop in mortgage cost with a drop in interest rates.

Cons:

  • Usually not the best deal available on the market.
  • Is subject to change, making it hard to budget.

Deposit requirement

Now you’ve thought about the repayment option that’s best for you, and you know which mortgage rate works. It’s time to think about the deposit.

The more deposit you put down when you agree to purchase, the lower your monthly repayments are. This is because you’re decreasing the overall value of the loan required. Most lenders will ask for a minimum of a 5% deposit, also known as offering a 95% mortgage.

If you own a home, you can use the equity you’ve built to help pay for your new house’s deposit. If you’ve been on an interest-only structure, you can use money gained through the appreciation of the property’s value when you sell for the deposit.

However, if you’re a first-time buyer, building a deposit is harder, especially in the current economic climate. In Somerset, the average house price is £373,628. This means any first-time buyer would need a deposit of at least £18,681.

Earlier this year, Skipton Building Society offered a new way for first-time buyers to get on the property ladder – the 100% mortgage. Other lenders have continued to follow suit.


100% mortgage

Qualifying criteria for a 100% mortgage with Skipton include:

  • You must be 21 or over and a first-time buyer.
  • You must have rented for at least 12 consecutive months out of the past 18 and provide evidence of timely rent payments. You can prove this via bank statements or confirmation from your landlord or letting agent.
  • You can’t have missed any repayments that you have, from your phone bill to your Spotify. Any missed payments will show up on your credit report.
  • You can’t buy a new-build flat.

Pros:

  • Can help first-time buyers onto the property ladder sooner.
  • Doesn’t require a guarantor.

Cons:

  • Potential for entering negative equity.
  • Expensive fees.
  • More complex affordability criteria.

There’s a lot to think about when buying a house, and we know that the process can be daunting. But our expert mortgage advisers are on hand to support you. For fee-free guidance and advice, contact us today. We’re here to make buying a home easy.