Choosing the right mortgage can save thousands of pounds and years of uncertainty. But 'right' means something different for every homebuyer. What's right for you? If you're reading this, there's a good chance you're coming up to one of life's biggest financial decisions. The mortgage you choose sets down how much you'll pay, how much you'll worry and how long you'll wait before you can change your mind. It could be 30 years, so it's worth taking 5 minutes to look at 3 questions... Interest rates where are they going? When financial institutions decide how much to charge borrowers, they base their decision on the Bank of England's base rate. So when this rate dropped by 0.25% to 5.5% in December 2007, the average cost of borrowing money went down. But different lenders offer different rates, and the same lender could offer two people two very different mortgages, based on a wide range of factors like how much they're earning, how much they want to borrow and what kind of deposit they're putting down. It's vital to shop around. When you're dealing with house prices, a one-percent difference in the APR (Annual Percentage Rate) makes a huge difference: on a 25-year 150,000 mortgage, a 6% deal can cost almost 294,000, while a 5% deal can cost around 27,000 less. You'll also need to compare set-up fees and early repayment charges before you can decide which deal is best for you. Fixed, Tracker or Variable? As the name says, a Tracker mortgage tracks the base rate. When the base rate goes up or down, so does the APR on your repayments. A Variable rate mortgage also follows the base rate, but not directly. Mortgage providers don't have to drop their rates when the base rate falls, but they could lose business if they don't. Many economists expect the base rate to reach 4.75% or lower by 2009, but they couldn't tell you where it'll be by 2019: in the last 20 years, the base rate has been as high as 15% and as low as 3.75%. So payments to a Tracker or Variable rate mortgage could increase or decrease significantly. It's a good way to benefit from the lows but only if you're prepared to risk the highs. That's why they're popular with people who have an element of flexibility and aren't sailing too close to their financial limits. No matter what happens to the base rate, your monthly payments wouldn't change on a Fixed rate mortgage. If you don't have the spare cash to cope with uncertainty, this might be a good choice. You might feel you're missing out if the rate does go down but if it goes up, you'll be glad you played safe. Most Fixed rate mortgage rates last for five years or less, and then the homeowner has to choose between moving to the bank's Variable rate or remortgaging. Repayment or Interest Only? Take out a Repayment mortgage and you'll pay off both interest and capital (a small part of the cost of the property) every month. Once you've spent enough time making those payments, you'll own the property. An Interest Only mortgage means you only pay the interest. Your monthly repayments are lower, but since you're not paying off the capital, it's important to put money into a 'payment vehicle' an investment that'll pay for the house at the end of the mortgage term. It's your future it's your choice When you're choosing your mortgage, remember the various choices exist because everyone has different needs and different expectations for the future. A mortgage broker can help you understand your options, but only you can decide which one is best suited to you and your finances.
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