What type of mortgage to choose?
Pick from a fixed, tracker or something more flexible
Getting a mortgage is one of the biggest financial commitments you're ever likely to make. So it's crucial to understand what type of mortgage will suit you best. This guide outlines the different types of mortgages available and helps you decide which one is right for you.
Mortgages & coronavirus
In light of the current coronavirus pandemic, some of the information in this guide may no longer be up to date. Please see our guide on Coronavirus Financial Help for the latest info on how the pandemic is affecting mortgages.
We are working to update this guide.
In this guide
Get Our Free Money Tips Email!
Choice 1: Repayment vs interest-only mortgages
There are three types of repayment structures: interest-only, capital repayment and 'part and part' (which is a mix of the two).
Your repayments are calculated so you'll have repaid all the debt and the interest over the term you agree (eg, 25 years). It means your monthly payments both cover the interest and chip away at the actual debt, so at the end you owe nowt.
This has a strange effect. In the early years, your outstanding debt is larger so most of your monthly repayments go towards paying the interest. Gradually, as you reduce what you owe, most of your repayments go towards paying off the debt.
For example, on a £150,000, 25-year mortgage at 3%, you'll pay £711 a month. After 10 years you'll have made £85,320 in payments, but only reduced what you owe by £47,000. Yet after a further 10 years, having paid another £85,320, you've reduced the debt by a further £63,420. This is because less interest is accruing each year.
Many people, once they realise this, then worry that if they ever remortgage to another deal, they'll lose all the work they've put into decreasing what they owe. This isn't true. Provided you keep the same debt and the same number of years left until it ends (ie, you have 14 years left to repay and you still intend to repay it in 14 years) it stays the same.
To see how your repayments would work in practice, check out our Mortgage Calculator.
Interest-only mortgages used to be really popular among first-time buyers but since the credit crunch it's highly unlikely a wannabe homeowner will be able to get their hands on one. And new laws that came into effect from April 2014 mean interest-only mortgages will only be offered where there's a credible plan to repay the capital, making them even rarer.
But here is how it works...
Here, you just pay the interest during the term. Your monthly payment doesn't chip away at your actual debt – it just covers the cost of borrowing the money. When the term (typically 25 years) is up on a £150,000 loan, you would still owe £150,000.
You have to pay back the amount you borrowed in one lump sum at the end of the mortgage term. So if you get an interest-only mortgage, you NEED to have a separate plan to pay off your debt.
The lender will want to see evidence of a convincing method you've set up (eg, savings) to build up enough cash to pay off the actual cost of the property.
So repayment wins hands down?
Putting the fact that it's difficult getting an interest-only mortgage aside, unless you have a compelling reason, repayment is really the way forward. Although you pay more each month, it's the only option which guarantees you owe nothing at the end of the mortgage term, as you're actually paying off some of your debt every month.
As the capital is gradually reducing, you pay less interest over the term than you would with an interest-only mortgage. When you come to remortgage, you'll have paid off more of the debt so you'll be able to get a mortgage with a lower LTV and hopefully a lower interest rate.
Get Our Free Money Tips Email!
Choice 2: Which type of mortgage is best for you?
What's a fixed-rate mortgage?
Think of a fixed rate like this. In return for signing up to it, the lender agrees to give you a short-term special rate. Regardless of what happens to interest rates, with a fixed mortgage your repayments are… er… well… fixed for the length of the deal.
Lenders call this the incentive period – and all fixed deals will have one, whether it's two, three, five, 10 or even 15 years.
Like all mortgage deals, fixed rates have pros and cons:
Certainty – you know exactly what your mortgage will cost.
Your payments won't go up over the life of the fix, no matter how high rates go.
You'll know EXACTLY what you'll pay, meaning you can budget around it.
At this point in time, starting rates are usually higher than on variable products.
If interest rates fall, you won't see your payments drop.
If you want to get out early, you'll usually pay high penalties.
If a fixed mortgage sounds good, think carefully about how long you want to fix for. Ideally, you don't want to leave the deal before the initial period ends, as there's usually an early repayment charge, which can add significantly to your costs.
The longer the fixed deal, the higher the rate is likely to be as the lender takes on more risk of interest rates changing while having to guarantee your rate. Like any insurance policy, this protection from rate rises will cost you.
But while a five-year fixed deal will normally have a higher rate than a two-year fix, in recent years the average gap in rate between the two has actually been closing. With this, five-year fixes have jumped in popularity as borrowers look to take advantage of cheaper rates.
Which to pick? It all depends on what price you put on your peace of mind!
Don't panic, you're not expected to repay your mortgage in full. If you choose a two-year fixed rate, for example, your rate is fixed for two years and at the end you'll go onto the lender's standard variable rate (SVR).
The mortgage illustration you'll be given by the lender or broker will tell you what today's SVR is. But be aware, this can be changed by the lender at a whim, so there's no guarantee what it'll be when you reach the end of your fixed deal.
If the SVR is higher than rates offered to new customers, most people will remortgage (replace the mortgage with a new one) on to a more attractive rate with a new lender.
Here your mortgage rate, as the name suggests, can and will usually move up and down. The major, but not sole cause of this, is changes to the UK economy.
In times of growth and inflation, interest rates tend to go up to discourage spending. This is to make saving more attractive and borrowing costlier – meaning people are less likely to borrow to spend. In downturns, interest rates are often cut to encourage spending.
To complicate things, variable rate deals fall into three categories: trackers, standard variable rates (SVRs) and discounts.
Here, the rate tracks a fixed economic indicator – usually the base rate, the Bank of England's official borrowing rate. This doesn't mean it's the same as the base rate, just that it moves in line with it.
Tracker mortgages are popular, especially in times of low or falling interest rates, but there are some pros as well as cons:
It's transparent as you've the certainty that only economic change can move your rate, rather than the commercial considerations of the lender.
Uncertainty – if rates rise, so will yours.
You're also locked into a fixed relationship, so if you're paying a rate several percentage points above the base rate and interest rates jump, it could mean huge future costs.
Tracker mortgage rates usually track above the base rate. For example, a tracker mortgage might track at the base rate (currently 0.1%) plus 1%, so that would be 1.1%. Currently, the best tracker mortgage rates you'll find are around the 1.35% mark. However, if the base rate was to increase by one percentage point, so would your mortgage.
Trackers range in length, with the most common being two years. Some trackers are for the full term of the mortgage, called a 'lifetime tracker'.
Like most incentive periods, there's usually a fee to pay if you leave early. Lifetime trackers often don't have any early repayment charge, or only have one for an initial period. It varies, so check carefully.
Some trackers don't follow the BoE base rate. Instead, they track the Libor rate (London InterBank Offered Rate), which is the rate at which lenders loan money to one another. Libor is more commonly used by 'sub-prime mortgages' and buy-to-let mortgages than standard residential ones, but watch for it.
Watch out for lenders who call their products 'trackers' but have their mortgage deals following a rate the lender controls. For example, Woolwich's tracker range follows the Barclays Bank Base Rate, meaning it's more like a discounted product than a tracker.
A true tracker should only move when the economic indicator it follows moves. But watch out for naughty lenders describing mortgage rates as trackers and then including small print that lets them up rates for other reasons.
Get your lender and broker to confirm there aren't any conditions like this and check the mortgage offer document carefully yourself before you sign on the dotted line. It's rare, but Bank of Ireland did this in 2013 (see the Bank of Ireland MSE News story.)
Standard variable rate mortgages (SVRs)
Each lender has an SVR which they can move when they like. In reality, this tends roughly to follow the Bank of England's base rate movements. SVRs can be anything from two to five or more percentage points above the base rate, and they can vary massively between lenders.
Critically, they're the rate that most borrowers end up on after the end of an incentive period such as a two-year fix or two-year discounted variable rate.
But they're often expensive, with average rates way above those of cheap fixes as of January 2020. Plus, they're risky as you don't know when the lender will move its rates – and it can move rates for commercial and economic reasons:
If interest rates are cut, your rate will likely drop too.
There is usually no early repayment charge meaning the mortgage can be paid back in full at any point without penalty.
If interest rates rise, your SVR will almost certainly rise too.
While you can be on a cheap SVR, the likelihood is that, in this market, a cheap fixed rate will be cheaper.
Even if you're on a costly SVR, if you've only a small amount left to pay it may not be worth changing lender. This is because, with switching fees so high, you are less likely to make a saving. For example, if you've only £25,000 left to pay on your mortgage and fees to switch are £2,000, you'll be spending almost 10% of what you owe to change.
SVR mortgages are rarely available to new customers nowadays, and even if they are, they're usually not as competitive as other rates.
Discount rate mortgages
These deals usually offer a discount off a lender's standard variable rate (SVR). Most of the discounts on offer tend to last for a relatively short period – typically two or three years, but there are lenders offering longer, even lifetime options.
Yet be careful when you read the marketing materials. How are they described? It can be confusing. Take, for example, 'a 2% discount'. Is this 2% off its SVR of 5%, ie, 3%? Or does this mean the rate you pay is 2%? Check carefully what you'll pay...
In the past, this was often the cheapest rate type, but now it's not always the case.
If interest rates are cut, your rate will probably drop too.
Uncertainty – there's no guarantee your lender will move its SVR down if the Bank of England base rate goes down. So you might not get the full benefit of all rate changes.
You're at the mercy of lenders hiking SVRs at their will, which directly affects your rate.
Remember that because lenders' SVRs can vary, it's not the size of the discount that counts, but the underlying rate you pay. ALWAYS examine the entire rate.
Should I go for a capped deal?
A capped deal is a variable rate, a discount or a tracker mortgage which has an upper limit – so the rate has a guaranteed ceiling it can't exceed no matter what the tracked rate rises to.
They tend to be offered most often, and are most popular, when people are frightened that interest rates could soar.
The rate you pay moves in line with the base rate or SVR, but there's an upper ceiling or cap which gives you some protection.
You benefit from interest rate falls and have some protection from rises.
The cap tends to be set quite high, and the starting rate is generally higher than normal variable and fixed rates.
Capped deals used to be more common, but they are now pretty rare – so the question of whether you should get one may not even come up.
Choosing between fixed & variable
A fixed rate is an insurance policy against hikes and therefore gives peace of mind. That has to be factored into the equation. Though how much that peace of mind costs you is important too.
Yet a shock horror thought from the Money Saving Expert. Here, choosing a rate isn't purely about which is the cheapest.
Deciding whether to fix is a question of weighing up how important certainty that your repayments will stay the same is for you. I tend to think of this as a "how close to the edge are you?" question.
Someone who can only just afford their mortgage repayments should not be gambling with interest rates. They'll benefit much more from a fixed rate as it means they'll never be pushed over the brink by a rate increase during the term of the fix.
Those with lots of spare cash over and above the mortgage may choose to head for a discount or tracker, and take the gamble that it'll work out cheaper in the long run.
Don't look back in anger
I'm sure Oasis were writing about mortgages when they penned that famous line. The truth is, the only way to truly know which mortgage deal is best is with an accurate crystal ball, and they cost way more than a house.
So if you do decide to go for a fixed rate on the basis of surety and later with hindsight realise a discount rate would've been cheaper, this doesn't mean it was the wrong decision. If you needed surety, remember, you got it.
I think it's time for an analogy
If I asked you to call heads or tails on a coin toss and said I'll give you £100 if you win, but you only need to pay me £1 if you lose, then provided you could afford to lose £1, you'd be a fool not to do it.
While the bet itself doesn't increase your chances of winning, the reward for winning is much better than the cost of losing. So if when we actually tossed the coin you lost, that doesn't mean the bet was a bad one. Even though the outcome wasn't what you wanted, you made the best decision based on the knowledge you had at the time.
The same is true with fixing your mortgage.
- Martin Lewis MSE founder and chair
A tracker follows the Bank of England base rate (or less commonly, the Libor rate) which is an independent economic indicator. This means your lender should only move your rate by the same amount and when the indicator moves. (Check the small print to make sure your lender hasn't left itself a loophole here – very rare, but it has happened!).
A discount is priced at a certain percentage below the lender's standard variable rate (SVR). The percentage discount cannot change but the SVR, can move willy-nilly based on the lender's own competitive reasons. The most important thing to remember is...
Lenders can do whatever they want with their SVRs. You have no guarantee on what'll happen with it.
Between July 2008 to March 2010, the Bank of England base rate dropped from 5.75% to 0.5%. Tracker products were usually priced below the base rate (eg, base rate minus 0.2%) so some borrowers did extremely well. But the lenders didn't do quite so well out of it, so some tried to limit their losses by applying a mortgage collar (minimum rate).
A collar stops the rate from falling below a minimum percentage rate – essentially, it's the opposite of a cap. Some lenders were sneaky and introduced this even though it wasn't in the paperwork, though this isn't allowed.
If you opt for a variable mortgage, make sure you check if there's a collar. Ask your lender (or broker) outright AND check the key facts illustration and mortgage offer carefully.
As rates change over time, simply comparing the fixed and variable rates at the point you take your mortgage is a relatively blunt tool. To work out which is truly a better deal, look at how much interest rates would need to change before one deal beats the other. This is where a broker can really help you see the wood for the trees.
Choice 3: What length of deal should I choose - two, five, 10 or 15 years?
Incentive periods range from two to 15 years and picking the wrong length can be costly. Yet many don't think this through fully. This can come back to bite you later, meaning you spend more than you need to.
There are many factors to consider before you choose, the key one being...
"How long do you need the certainty for?"
This is most appropriate with a fixed-rate mortgage, as your monthly payments are fixed for the term. Generally speaking, the longer you fix for, the more it will cost. But if you need the certainty of knowing what your payments will be, a fixed mortgage will do this for you.
When is a two-year deal NOT a two-year deal?
Many products will have a name that states the initial rate will last a certain number of years, but will actually have a specified end date.
Depending on how long it takes to complete the mortgage (to draw down the money), you could end up with a product that could last months less or even more than you anticipated. So check the detail carefully.
Don't just rely on the name of the mortgage product on the front page of the illustration. Check the section that details the rate, if it has an end date, it'll look something like this:
2.19% fixed, ending 31/01/2022
Before you can select the right incentive period for you, you need to consider the following:
Mortgage fees can add up if you constantly switch deals
Two-year incentive periods are extremely popular because they're usually the lowest rates. But their fees tend to be just as high as longer deals. So think about it – over 10 years, if you have five separate two-year deals, you could be paying £7,000 in arrangement fees (£1,500/deal).
But if you can get two five-year deals, then you'd only need to pay £3,000, potentially saving £4,500.
Fees can be even more expensive if you can't pay them upfront. You'd have to add them to your mortgage debt and pay interest on them for many years.
Read our Mortgage Fees guide for a full rundown of what you could have to pay.
If you fix for a long time, plan to stay in your property
There's not much point picking a cheap five, seven or 10-year fix if there's a good chance you may want to move in three years as there will undoubtedly be a charge for repaying early (either selling up or replacing this mortgage with a new deal from another lender).
For example, don't be swayed by a rock-bottom long-term fix for your flat if you and your partner are trying for a baby and will likely need a bigger property in the very near future.
Early repayment charges can be huge, as much as 5% of the loan, and will differ widely between products and lenders. See below for more on early repayment charges, and how to avoid them.
How long should I set the mortgage term for?
As well as choosing the length of your introductory deal, you also need to choose how long the mortgage will run for. It's an important factor, and it's often overlooked.
Most people plump for 25 years – but it doesn't have to be that long. A shorter mortgage term means higher repayments, but less interest overall. But there's a couple of factors to take into account when you choose:
- How old will you be when the term ends? Some lenders won't allow you to take it into your retirement period, while, increasingly, others will. Age is an important consideration, as you have to question whether you could you keep up with the repayments.
- The longer it is, the more you pay. Lengthening the term to, say, 30 years means you pay less each month, but you pay more interest in total. Shortening the term is a bit like overpaying, it's far cheaper if you've got the cash. However, if the mortgage allows you to overpay, better to keep the mortgage long to give yourself flexibility, then make overpayments.
Try using the MoneySavingExpert.com Mortgage Best Buys comparison to see how changing the length of your mortgage term will affect your payments.
Most mortgages allow you to overpay a certain amount a year (usually 10% of the outstanding debt) without triggering the early repayment charge. Check what your deal allows.
If you have plans to pay off a lump sum that exceeds the overpayment limit then you'll need to weigh up the costs of doing that if you're tied in. It may be better to wait to pay the lump sum once the incentive period is over.
If you have a strong opinion on what interest rates are likely to do, this will obviously influence your decision. Just be sure you can afford to get it wrong as even market experts can't guarantee what'll happen.
If you think about it, a fixed or discount deal is a special offer – a reduced rate from the lender in the hope that once the cheap price ends, you'll stick with it and maybe even pay more (sometimes you'll actually pay less).
To ensure you don't just chop and change your mortgage once a better rate comes along, many lenders impose an early repayment charge. Lenders aren't allowed to stop you repaying your mortgage, but they are allowed to penalise you for doing it early. The charge will apply if you:
- Pay off the mortgage in full (eg, you inherit a pile of money and just want to clear the mortgage off; or you remortgage, meaning you get a replacement mortgage with another lender); or
- Pay the lender back more than you're allowed to. Any payment over and above your normal, agreed monthly payment is called an overpayment. Most lenders allow you to overpay a certain amount, but breach this and it could cost you.
This is why it pays to decide on an incentive period that's right for you. If you end up having to move or sell the house during the term, the penalties to get out of your deal can be large.
An early repayment charge can be 1-5% of the amount you pay off early. Clear a £150,000 mortgage and you'll pay anything from £1,500 to £7,500. Overpay by £1,000 and it could cost you £10-£50 for the privilege.
But it varies, so check the small print. It'll be in the illustration (but check the mortgage offer as well, as the lender doesn't always get them to match as they should). The early repayment charge is usually a percentage of the amount you overpay. It's quite common to see the percentage charge reduce the further into the tie-in period you go.
For example, a five-year fixed deal may have an early repayment charge of 5% in year one, 4% in year two, and so on.
Not every deal has an early repayment charge. You can sometimes overpay without being stung, particularly on lifetime deals, and there have even been rare examples of fixed rates with no tie-in.
Once your fixed or discount deal ends, in most cases you are free, and you should consider switching the deal.
We say this because once your deal ends, you'll be shifted onto the standard variable rate, which is usually uncompetitive.
In recent times, some lenders' SVRs have been quite decent, so it's not always worth switching, particularly if your mortgage debt is low.
Still, good practice is to start looking a few months before your special offer ends to see if you can get a cheaper remortgage deal (remortgaging just means switching mortgage) as for every 1% of interest you cut per £100,000 of mortgage, that could be £80+ month saved. Full help in our Remortgage Guide.
One warning is that some products can have an 'overhang', otherwise known as an 'extended tie-in' or 'extended early repayment charge'. These last for a period after the special offer period, ie, when you're on the higher SVR. Cheeky, but we've seen it happen!
They were used by lenders in the past so they could offer really attractive low initial rates, knowing they would recoup some of the money later. Uninformed borrowers got a nasty shock when they moved onto the SVR and found they'd still have to pay a sizeable charge to remortgage. They are few and far between, but do check, and try to avoid them.
You might be okay with an overhang if it gets your costs down low at the start, when you're first buying. But you need to be sure it's good value overall and that you can definitely afford it when the rate goes up.
Remember, you'd be going on to the SVR, which the lender can move at any time. That means it could be higher than illustrated, so you need to be sure you could cope. You might enjoy the initial low rate but will you really be happy when the rate bumps up?
If you think you might move during the incentive period of the mortgage, you need to look for a mortgage deal that allows 'porting'. This just means that you can move the mortgage to another property without incurring an early repayment charge.
A deal that allows porting can be attractive if you want a long-term, low-rate incentive period, but aren't 100% sure you'll want to stick with the property for the length of the deal.
Not all mortgages are portable and allow you to move them to a different property. Even if your deal is portable, it doesn't guarantee the lender will let you move it. It can refuse your application to port for many reasons – for example, if it doesn't like your property, you can't prove your income, your income's changed or you're in arrears.
Choice 4: Do I want my mortgage to be flexible?
Once you've got an idea of the key requirements for your mortgage, the next question is: do you want a mortgage that's more flexible?
This means getting functions that allow you to over- or underpay, and borrow money back. Sometimes flexible features are included in the cheapest mortgages already, which is an added bonus.
Other times, you might need to take a higher-rate product to get the feature you want. You'll need to weigh up what you definitely need, what depends on cost and what doesn't matter as you'll probably not use it.
The MoneySavingExpert Mortgage Best Buys tool will show you the top mortgages that fit your criteria, and will tell you if your chosen mortgage has any flexible features.
Flexible feature 1 – Can you, and should you, overpay?
Far more important than the others, is the most popular flexible feature – the ability to overpay. This just means paying more than your agreed monthly repayment – whether each month or just shoving a lump sum at your mortgage from time to time.
Overpaying can result in clearing the debt substantially quicker, so you pay less interest overall. The impact of this can be huge.
If you had a £150,000 mortgage over 25 years at 5% interest, your monthly repayments would be £880. Over the term, you'd pay £113,000 in interest. If you overpaid by £100 a month, you'd repay the mortgage four years and seven months quicker, saving £23,350 in interest.
Luckily, most mortgages allow you to make some form of overpayment. So you don't always need something special (as special usually costs more).
However, they usually restrict the amount of money you can overpay – typically 10% of the outstanding mortgage/year, or a fixed max amount each month (do more and there are harsh penalties). Less commonly, they might restrict when and/or how often you can overpay.
So you need to work out how much you're likely to want to overpay by, and when you're likely to want to overpay.
Timing your overpayment
Mortgage companies calculate how much interest you owe on the debt at different times. The vast majority do it daily, a few quarterly or yearly. You need to know how yours works so you can time your extra payments.
With daily interest the timing doesn't especially matter. You benefit the next day, so sooner is always better. However, it makes a huge difference if interest is charged annually – and middling if it's monthly or quarterly.
This is because mortgage overpayments will only count to reduce the interest you pay AFTER the calculation is made. Put it in at the wrong time and you'll miss out.
Say the amount you'll be paying in interest is worked out on December 31, then you need to make sure you pay the extra in before Christmas. Leave it until January and you lose the benefit of overpaying. You'll still be charged interest as if you hadn't made the overpayment until next 31 December.
Most mortgages these days are daily interest, but be sure to check.
Does the mortgage have a 'borrow back' facility?
If you're overpaying, a few lenders will allow you to get the overpayments back if needed – though they don't always shout about it, making it a hidden bonus.
If your lender allows you to do so, then you can effectively use your mortgage as a high-interest savings account. If you leave money in it temporarily, the net effect is the same as earning interest tax-free at the mortgage rate – very few savings accounts will beat that right now.
Flexible feature 2 – Can you take payment holidays?
Here, the lender will allow you to simply stop paying it when you want. But be careful. Lenders don't let you play hooky from the goodness of their hearts.
Some lenders insist you've overpaid first (so it's the same effect as the borrow-back). If they don't, then you'll pay for it as the interest continues to be added to your loan and you're not clearing anything.
Typically, borrowers taking a 'holiday' arrange to miss one or two payments, and their monthly payments are recalculated to spread the cost of those missed payments the rest of the life of your loan – in other words, your repayments will go up.
In addition, there could also be an extra penalty or administration charge on top.
Be careful: You can't just decide to take a payment holiday because it's a feature of your mortgage, always arrange it with your lender first.
If you don't, it'll hit your credit file and look like you've missed payments willy-nilly. This will seriously damage your credit score and your remortgage chances in the future.
UPDATE: One-off mortgage holidays due to coronavirus crisis. If keeping up with your bills and food on the table has become a challenge and you're finding it hard to pay your mortgage, speak to your lender. In March, banks agreed with the Chancellor that they will offer 'forbearance' (tolerance and help) on mortgages and other loans secured on your mortgage.
This means they should offer those struggling a 'payment holiday', allowing customers a temporary break from having to make mortgage payments during this time. For more, read our coronavirus mortgage hols lowdown.
Flexible feature 3 – Offset and current account mortgages
So far, the focus has been on mortgages that are variations on a simple theme. You borrow a set amount of money, you pay back a certain amount every month, and your debt is the amount you borrowed minus the repayments you've made. So far, so straightforward.
However, for ultimate flexibility, there are mortgages specifically designed to allow you to use them as a place to put your savings. They still come in variable or fixed deals as described above, but with a twist...
An offset mortgage keeps your mortgage debt and savings in separate pots with the same bank or building society. But the big difference is your cash savings are used to reduce – or 'offset' – the amount of mortgage interest you're charged.
So, if you've a mortgage of £150,000 and savings of £15,000, then you only pay interest on the difference of £135,000.
You still make the standard repayment every month, but your savings pot acts as an overpayment, wiping out more of the interest every month. This will help you clear the mortgage early.
So, as you're repaying more quickly, it'll cost you less overall. The most important point is the money can be withdrawn whenever you want with no problem (but obviously then it no longer offsets your mortgage debt).
Offsets are a good way for your family to help you cope with your mortgage, if they have savings and you don't, but they don't want to necessarily part with their cash.
Rather than giving you money to reduce your mortgage, they can deposit their savings in an account with your lender and link them to your mortgage. This reduces the capital you owe without losing access to them. All they lose is the interest which, let's face it, isn't much anyway these days.
Many people get very excited by the idea of offset, but hold your horses. The problem is that offsets are usually at a higher rate than standard mortgages.
Think about it. If you've a £200,000 mortgage, while getting a better rate on £20,000 of savings is nice – you don't want to pay a worse rate on the remaining £180,000 debt. So in the main, unless the offset is really cheap (ie, it's not much more than a non-offset mortgage), only those who'll be offsetting a substantial amount of savings should bother.
Even then, you could just get a smaller normal mortgage and borrow less or overpay.
Current account mortgages
This type of mortgage used to be far more common than it is now. Here, as it says on the tin, your mortgage is combined with your current account, so you've one balance.
So if you have £2,000 in your current account and a mortgage of £90,000, then you're effectively £88,000 overdrawn. The debt is smallest just after your salary is paid in, and it then creeps up throughout the month as you spend your salary.
You make a standard payment every month which is designed to clear your mortgage over the term you've chosen. The extra money floating around in your account is like an overpayment, which should mean you pay the loan off much more quickly.
Any extra cash savings can be added to reduce the balance further. Many people liked the idea but didn't like constantly seeing a debt figure in their bank account.
The additional benefit of the current account element is often overstressed. Unless you have huge fluctuations in salaries and big bonuses, it's a tiny saving compared to an offset – and the costs of these mortgages are often much more.
Choice 5: How do joint mortgages work?
When you take out a joint mortgage, the lender classes you both as 'jointly and severally liable' for the debt. This means the lender can pursue you both, or either of you separately, for the full debt.
It's possible to take out the mortgage in just one name, but the named person is responsible for the mortgage and the other person's income won't be taken into account, so it's likely you won't be able to borrow as much as two of you could.
A lender may ask you about anyone else living in the property aged 17 or over, and may want to know why they're not on the mortgage. They're not going to be too fussed about your 19-year-old student son, but they will want to know why you have a partner living there that's not being named on the mortgage.
The most common form of ownership between couples is 'joint tenancy'. It means you both own the property. If you were to split up and can't decide how to divide up its value, the courts will decide for you. If one of you were to die, the property would revert in full to the survivor.
The other way is to be 'tenants in common'. Under this, each person owns a specified proportion of the property, say 50/50. Then if you break up or one of you dies, it's clear who owns what. This can also be used if one person's putting down a significantly larger deposit than the other.
Remember though, either type of ownership does not stop you being jointly and severally liable for the mortgage debt.
There's a growing trend for friends (or siblings) clubbing together to buy a property – some lenders allow up to four people to get a joint mortgage. Pooled salaries will increase your buying power, but remember you are jointly and severally liable for the mortgage.
You need to consider what would happen if one of you wanted to sell your share or lost your job. The lender won't care if three out of four of you paid your share. It'll want its money and will pursue all of you for the debt. In reality, it's likely to put more effort into chasing the person who is still working than the person who isn't.
Buying with other people isn't something to be taken on lightly. Once you take on a mortgage together you're financially linked – your friend's credit rating will now affect yours and even a partial missed payment will go on all your credit files. Don't do this without sorting a legal contract between you covering all the 'what if' possibilities and what your rights are.
Choice 6: Guarantor mortgages – are they worth it?
If a mortgage lender isn't willing to lend you the amount of money you need (you don't earn enough, or it thinks you'll be stretching your affordability too far), a guarantor mortgage could get you the loan amount you needed.
A guarantor is somebody who promises to make your mortgage payments if you fail to do so. They don't own the property so are not on the title deeds, but they have signed a legal contract with your mortgage lender.
If you don't make your payments, the lender is free to pursue the guarantor as well, even forcing them to sell their own home to make your repayments. This is a huge commitment, so check your guarantor fully understands what they're signing up to.
The lender also wants your guarantor to seek independent legal advice before signing (to make sure they can't worm out of the contract later by saying they didn't understand).
Your guarantor will be committed until the lender is willing to release them, or, the guarantee may be for an agreed period of time, eg, five years, at which point the mortgage debt will have reduced to a level the lender is comfortable with.
Some guarantor mortgages require the guarantor to place a sum of money in an account that cannot be accessed for a period of time. This gives the lender more confidence that if you don't pay, there'll be an account with money in it waiting.
It's definitely worth speaking to a broker if you need to go down this route – not only do you need to be creditworthy enough to get a loan from the lender, but your guarantor will also be assessed to make sure they could make your repayments on top of their own commitments.
Now you know what the different types of mortgages are, there are two options. If you've a small deposit, check the Mortgage Schemes guide for information on Help to Buy & other mortgage schemes.
If you've a big enough deposit and income to buy a property outright, see the Mortgage Fees guide to find out about buying costs.
Get Our Free Money Tips Email!