Making sense of mortgage types



Your home may be repossessed if you do not keep up repayments on your mortgage.

 

Choosing a mortgage isn’t as simple as looking at the interest rates and fees you’ll be charged. With so many different types of mortgages you need to consider what the right type for you would be.

 

Fixed rate mortgages

This is where the interest you are charged remains the same for a set number of years, usually between two to five years. With a fixed rate mortgage, you can budget more easily and don’t have the worry of interest rates going up. However, if interest rates drop you won’t benefit.

You should be aware that there may be charges if you want to leave the deal early before the fixed rate period ends. As it nears the end of the fixed rate term you should look for a new mortgage deal a couple of months earlier. Once the fixed rate deal ends you will automatically move onto the lenders standard variable rate (SVR) which is usually higher.

 

Standard variable rate mortgages

This is the normal interest rate your lender charges house buyers. It will last throughout the term of your mortgage unless you choose to take out another mortgage deal. When there is a rise or fall in the base rate set by the Bank of England, changes in the interest rate may occur which means your rate could increase or fall at any time.

 

Tracker mortgages

This type of mortgage moves in line with the Bank of England’s base rate plus a few percent. If the base rate increases by 1% then so will your interest rate. Usually these mortgages are for two to five years, but some lenders offer them for the full term or until you switch to a new mortgage deal. The benefit of this type of mortgage is when the rate falls so will your mortgage repayments. But likewise, when it increases your payments go up. You should also check for early repayment charges if you want to change before the deal period ends.

 

Discount mortgages

This is where a lender offers a discount off their standard variable rate (SVR), but it only applies for a specific length of time, usually two or three years. Do not assume that the biggest discount offered means the lowest interest rate. SVR’s vary across lenders so it pays to shop around.

 

Capped mortgages

With this type of mortgage your interest rate moves in line with the lenders SVR. However, the cap means it cannot rise above a certain level. Whilst your rate wont rise above the level set, you should ensure you can afford to make the repayments if interest rates do rise to the capped level.

 

Offset mortgages

This type of mortgage links your savings and current accounts to your mortgage and you only pay interest on the difference. Whilst you still pay your mortgage each month your savings act as an overpayment which helps to clear your mortgage early.

 

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