Mortgages: 1) The best mortgage for you

When entering into a mortgage for the first time, it is important to realise that what seems to be the cheapest option may not necessarily be the deal that’s right for you. Quoted rates are a snapshot in relation to how the market is performing at a particular point in time, and in this respect it is a good idea to examine the history of your Lender’s performance over the last 5-10 years. This will give you an indication of how competitive their rates have been over a longer period.

We all want a mortgage that will cost us as little as possible over it’s term, but what we need to remember is that we also need mortgages that will bend with our various needs as their term progresses.

It seems that there is very little difference between rates quoted by Lenders at any given point in time. However, since the Consumer Credit Act was passed in 1996, Lenders must now quote an APR (annual percentage rate) on their literature, this figure provides us with a truer figure regarding the cost of our mortgages in that it also reflects the associated costs of your mortgage. These may include, indemnity bonds, bank charges, arrangement and legal fees etc.

Many people believe that when choosing a rate, the main concern should be to choose the cheapest rate quoted. Of course this makes sense, but there are other considerations to be made at this point.

There are two types of interest rate to choose from, i.e.: fixed interest rates and variable interest rates.

For the First time Buyer a fixed interest rate can be convenient in that your mortgage repayments remain the same for the fixed rate period and therefore budgeting your mortgage repayments can be easier as you will need to put aside the same sum every month. You can fix your interest rate over different periods from 1 year to 10 years. Your rate will be fixed on the day that your mortgage is drawn down (ie:when you get your mortgage cheque). This means that the rate you fix at could be different to that rate upon which you were quoted if there is a substantial time lapse between the two dates.

A variable rate on the other hand can increase or decrease in line with the current markets and therefore, so too, can your mortgage repayments. It is possible however when on a variable rate to transfer to a fixed rate option at your own discretion. This is not an option for moving from a fixed rate to a variable without penalty charges for doing so, which could be up to six months interest. Also, there are two types of variable interest rate, standard variable and discounted variable rates. The latter will also fluctuate, but there is a discount applied to the variable rate for a set period.

Your next choice will be the type of mortgage to opt for. For the first time buyer this choice will be between an annuity mortgage and an endowment mortgage. Most people tend to opt for an annuity mortgage, which is the more traditional form. This is where both the capital sum (ie:what you borrow) and the interest are repaid at the same time so that at the end of your mortgage term, there are no monies owing to the Lender.

The second option is an endowment mortgage. This works on the principle that your mortgage repayments would consist of interest only to the Lender and you would take out an endowment policy designed to grow over the term of your mortgage in order to repay the capital sum when your mortgage term is finished.

Facing all these decisions for the first time can be quite daunting.

Ensure that you are comfortable with the way in which your mortgage has been set up on your behalf and that you are aware of the options that are available with the package that you opt for.

Take the time out to discuss these with your financial advisor. At the end of a day it is a personal decision, which is to be based on your own needs. If you are unsure about what way to structure your loan, why not ask your Lender to split your loan between a fixed rate and a variable rate. In this respect, you can have the best of both worlds.