The importance of choosing the right mortgage

A mortgage is likely to be the biggest and most important financial commitment you make in your lifetime – and as such it should be chosen very carefully. Choosing the right mortgage could save you a lot of money in the long run, so it’s wise to do your research and take good advice before you make that choice.

This advice isn’t just for new homebuyers, either: choosing the right mortgage when you are remortgaging is equally as important. Remortgaging is much the same as when you first take out a mortgage – only you have the experience (and hopefully the lender’s confidence) required to get the best possible deal.

What types of mortgage are there?

There are two main types of mortgage available:

Fixed-rate mortgage

The idea behind a fixed-rate mortgage is that it offers security. As the interest rate is fixed (either for the duration of the mortgage or for a shorter period at the beginning), the homeowner pays the same amount towards the mortgage each month, making planning for other financial matters much easier.

But there are two main downsides to fixed-rate mortgages. Firstly, the best deals often come with high mortgage arrangement fees, which can be paid up front or added to the loan. Secondly, if interest rates go down at any point, fixed-rate mortgage holders may find themselves paying more than they would have paid on an adjustable-rate (variable) mortgage. Many homeowners are happy to take this risk, so long as the interest rate is not too high.

Fixed-rate mortgages are widely considered the ‘safe’ option, but consider how high the interest rate is compared to recent years before you make a decision. If the interest rate is currently high, chances are it will come down again soon – so you may well save yourself money in the long run by opting for a variable-rate mortgage instead.

Adjustable-rate mortgage

An adjustable-rate (or variable-rate) mortgage means that the interest added to monthly mortgage repayments is liable to change to reflect market conditions – not only the Federal Reserve base rate, but also supply and demand for housing, inflation, unemployment levels, etc.

Adjustable-rate mortgages usually represent a lender’s cheapest rate at any given time, and rarely come with an arrangement fee. As such, it is the most commonly chosen type of mortgage, and so long as interest rates do not rise too much over the course of the mortgage, it is possible to save the homeowner a lot of money compared to a fixed-rate mortgage.

However, there is the risk that interest rates could rise, meaning adjustable-rate mortgage holders can sometimes find themselves with unexpectedly high monthly repayments. To protect customers, many lenders offer a ‘rate cap’, so that the rate cannot raise above a certain limit – but this is still likely to be higher than the homeowner would have paid on a fixed-rate mortgage.

Adjustable-rate mortgages are potentially cheaper, but they are a higher risk. If you are thinking of going down this route, make sure you have enough room in your finances to cover any sudden increase in mortgage payments.

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