Understanding mortgage types
Andy again today. Last time I gave you a bit of a heads up about some of the hidden costs associated with buying a house, so today I’d like to extend from that and have a look at some of the different mortgage types that are available. There are lots of different options these days, and it’s pretty important for your financial future that you choose the one that is going to be best for you.
One of the things we really struggled with when we set up our mortgage was trying to figure out all the different pros, cons, fees, and mechanisms of each type. This was compounded by the stress of trying to find our dream house, have our offer accepted….. all in all, it was a very steep and stressful learning curve for us both. Unfortunately our bank was a bit useless at helping us understand what we were getting ourselves in for, we’d trusted a bit much that they would be good advisors (particularly since their slogan is “helping people be good with money”). Ha.
Luckily our story has a pretty happy continuation: we are living in a house we love, and we have our mortgage set up in the way that best works for us.
I want to make things a little bit easier for you, and save you some of the stress we went through.
I’ve put together a very basic table comparing some of the common mortgage types to help you out (and make sure your bank clarifies everything for you, push them!)
Comparison of common mortgage types
Em and I use a mixture (not interest only though!)
We have a large portion of our mortgage in a 2 year fixed rate.This helps us budget because the payments are quite rigid. We’re up for penalties if we pay more than the minimum though. This is because the bank is giving us a “good deal” with a low interest rate. They don’t want to lose money by us then having more cash around to pay off lump sums!
We therefore have approximately 1/3 of our mortgage on a variable rate. This one is more flexible. It is a higher rate than the fixed rate, but we are allowed to pay more than the minimum. We wanted this so we can pay off a chunk of principle via our savings (yes, despite having mortgages, student debts, and credit cards; by using exactly the sorts of tips we give you, we have savings too ).
The other cool thing is that the variable portion of our mortgage is offset by all our bank accounts. For example, if we had $100,000 of our mortgage on a variable rate but between us we had $15,000 in our other bank accounts, we only pay interest on $85,000. This saves us on interest payments.
So overall, we end up with a fairly good idea of how much we need to budget for our repayments, we can save a little, and we have some flexibility. This works for us, and our situation. We’re not saying it’s best for everyone. Your situation is probably different and you will need to get independent advice. But hopefully we’ve helped answer some of the initial questions, and have set you up for a smoother path to getting that mortgage.
Anyway, I hope you find this table helpful, and that it clarifies a few things for you.
image by 401(K) 2012, CC 2.0, https://flic.kr/p/bnFPCn