What you need to know: mortgage types
At Mishon Mackay, we know how stressful buying a new property can be, which is why we work with experts who can help you with other services that are required through the process.
With more than 30 years in the business (just like us), we’re pleased to partner with Seico Mortgages and Insurance to provide you with trustworthy mortgage advice.
In our ‘what you need to know’ series, we’ll share advice, knowledge and tips from CEO and Founder, Rob Starr, who knows the mortgage industry like the back of his hand. This blog focuses on the common question of ‘will my mortgage stay affordable?’.
The most worrying thing for most people once they have committed to a mortgage is whether the monthly interest rates will go up at any time, increasing monthly costs beyond what is affordable. There are a number of ways you can protect yourself against this happening.
First and foremost, the best protection for affordability is not to take on a mortgage or loan that is so close to your affordability that a slight change can compromise you. There is always risk when borrowing any money, including risk of your income changing. However, you should always leave some room for movement in case your circumstances change. You can talk through the possibilities with a trusted mortgage broker to ensure you’re picking the right mortgage for you.
A fixed mortgage is a way of making sure your payments do not change for a certain amount of time. The lender themselves (bank, building society etc.) is able to offer you a fixed mortgage for 1-10 years, though some will even offer longer. Simply put, for the length of the fixed period, your payments will not change on the amount borrowed. A longer fixed period will have a higher cost whilst a shorter period will have a lower cost. The choice is yours and should be based on your own risk level. There is a cost to come out of a fixed period early, so you need to really think about the length of the fixed term you choose. Fixed mortgages are by far the most popular in the market and they average three to five years.
A capped mortgage is similar to a fixed mortgage; however, the difference is that a capped mortgage is only capped at the top and can therefore go down. If your mortgage is capped at say 5% then for the period of the cap, your mortgage can never go above that – in effect it has a cap (a lid) put on to stop it going further. However, there is no bottom figure, therefore if interest rates go down then so do your payments.
With this in mind, it makes capped mortgages financially more attractive than fixed. However, the flexibility comes at a cost and the interest rates being charged on capped mortgages start higher than fixed mortgages and the fees involved (both set up fee and early repayment fees) will generally be more.