It is sad that one of the preconditions of buying a home is to learn a new language. Welcome to the world of fixed, capped, discounted and standard variable mortgages. Choosing the right type of mortgage is very important and could save thousands of pounds over the full repayment period. The obvious illustration is that two decades ago housebuyers almost automatically went for endowment mortgages which were strongly recommended by mortgage lenders.
Now endowments account for just 6 per cent of new business. Many people paying off policies face shortfalls and wish they had chosen repayment mortgages instead. Too often homeowners accepted mortgage lenders' advice or followed the herd and are now paying the price.
There is no simple answer over which mortgage is best for you. It depends on your circumstances and your attitude to risk. People on lower incomes may need to opt for the lower risk option, which means fixed or capped mortgages.
Ray Boulger, technical manager for mortgages at John Charcol, explains: "If someone is borrowing a large amount in relation to their income, or their commitments are such that they have little spare cash, they should take a fixed or capped rate to safeguard against rates going up - even though they are not likely to at the moment. And lots of people like the comfort of fixed or capped rates. It makes budgeting simpler."
Others, with perhaps a more sophisticated approach, may also opt for fixed or capped mortgages. "That would be someone who takes a view of interest rates and thinks the fixed rate represents good value," says Mr Boulger. For most homebuyers, choosing between the two will be a simple choice of which is cheaper. In the past capped rates were typically cheaper than fixed rates - now fixed rates are lower. Accordingly, there is a shift by borrowers and brokers away from capped mortgages, in favour of fixed rates. "People should look at the two options and make a judgement after they have considered both." says Mr Boulger.
The days have gone when mortgage lenders offered borrowers similar standard variable rate mortgages - mortgages whose rate of interest goes up and down largely in line with the Bank of England. Instead, lenders are in a highly competitive market fighting for new business by offering heavy discounts.
With the growth of the remortgage sector - with borrowers cashing- in existing mortgages and replacing them with new mortgages to cut costs - even existing customers can expect to move from standard variable rate mortgages to discounted deals.
But the risk in going for a discounted rate mortgage is that they usually come with redemption penalties to enforce customer loyalty. In some cases it may be better to opt for a slightly more expensive mortgage that is free of redemption penalties. …