Understanding Mortgages

A conceptual image of someone receiving their key to their new home.

There cannot be many – if any – people who have not needed to take out a loan at some stage of their lives. Whether it’s for a house, a new car, the holiday of a lifetime, a computer or some other high-ticket item, chances are you have taken out a loan already or are thinking about doing so.

When you do decide to take out a loan you need to think very carefully about what type of credit is best for your purposes. The largest loan you are likely to take out in your lifetime (and you may do this more than once) is a mortgage for a house, a flat or an apartment. In the current financial climate – and given the huge problems following the financial crash of 2008 – lenders have tightened up their criteria for applicants they will lend to and how much they are prepared to advance against income.

There are numerous suppliers of mortgage loans on the market and a wide range of deals from which to choose. Although there are several different types of mortgages, you will probably look into two main sorts, fixed and variable rate.

A fixed rate mortgage has an interest rate fixed for a period of years, usually between two and five, before reverting to a variable interest rate linked to (but not the same) as the Bank of England’s interest rate. This can help with your financial planning, especially if you are working towards having a family or already have one. As the name suggests, during the fixed period, the interest rate won’t change even if the Bank of England’s base rate fluctuates.

A variable rate mortgage means that if the base rate rises so will the mortgage rates, and equally if they fall so will your repayments, though this may depend on the size of the change in interest rates.

Whatever you do, think through your options carefully before taking your final decision as to which type of mortgage best suits your personal circumstances.