Different Mortage Rate Types
Many types of mortgages are available on the market, all with their own pros and cons which can be very confusing. But don't worry, we'll take the time to make sure you fully understand the mortgage we recommend.
The basic idea behind the main types is outlined below. Sometimes a mortgage may be a combination of some of these.
Repayment Mortgage
With this type of mortgage a set term is agreed and your monthly payments cover repayment of the mortgage capital and interest. It ensures you will have paid off the mortgage completely at the end of the term.
In the early years of the mortgage most of your monthly payment will be the interest part of the mortgage and a small amount of capital. As the mortgage term reduces, more of the monthly payment goes against reducing the capital.
Interest Only Mortgage
You will only be paying the interest part the mortgage so at the end of the mortgage term your mortgage will still remain outstanding. With this kind of mortgage you should have a repayment vehicle in place to pay the mortgage off. Otherwise your property will have to be sold to clear the mortgage.
Standard Variable Rate Mortgages
With this mortgage you would be paying the lender's standard variable rate. This rate often follows the Bank of England base rate either by going up or down but not necessarily at the same amount as the Bank of England base rate.
Most borrowers would be transferred onto their lenders' standard variable rate at the end of their initial deal. At this point it is important to consider the benefits of another deal which can often give significant savings.
Fixed Rate Mortgages
Fixed rate mortgages give you peace of mind that for the next 2, 3, 4 or 5 years your monthly payment will remain the same, allowing you to budget more easily. Whether interest rates rise or fall, your rate remains the same. First time buyers often favour the security of these mortgages.
Tracker Rate Mortgages
These mortgages usually track the Bank of England base rate. When the base rate goes up or down your interest rate will follow. There are often incentive rates given on a 2 or 3 year term. Sometimes they come with a "collar" meaning the rate you pay can never fall below a certain rate whatever the base rate does.
Capped Rate Mortgages
Within a certain period of time of say 2 or 3 years you will know the maximum rate you may have to pay. Capped rates are similar to variable rate mortgages but have the advantage that there is a maximum rate they cannot go above. You will benefit from interest rate falls, although there may again be a collar on the mortgage.
Discounted Variable Rate Mortgages
This allows you to benefit from a discount off the lender's standard variable rate. Often lenders change their standard variable rate either up or down so your interest rate will also go up or down. For example, if the lenders' interest rate is 5% and you have a 2% discount you would be paying interest at 3%. If their standard variable rate went up by 2%, your rate would rise to 5%.
Offset Mortgages
You offset your savings against your outstanding mortgage amount to determine the interest payable. Your main current account or savings account or both would be linked to your mortgage. Every month the amount you have in these accounts will be offset against your mortgage balance before any interest is calculated.
Flexible Mortgages
Flexible mortgages allow you to make over payments in lump sums, often without incurring early repayment charges. In some circumstances it may be possible to take payment holidays. They can be particularly useful if your income is variable.
We will be happy to talk you through what is likely to work best for you.
