Types of Mortgages Explained

Mortgage-Cloud270With several types of mortgages available, choosing the right one can be tricky.

This guide explains the key features of each mortgage type in plain, simple English to help you find the right product based on your income, deposit size, attitude to risk, and other circumstances.

“What Next?”

For more information about the deals on the market today, get free advice from our team of specialist Mortgage Advisors. Our experts will talk you through the different interest rates, costs, and all other features to help you find the best deal to suit your needs.

FIXED RATE MORTGAGE

A fixed rate mortgage is ideal for those looking for security and the option to budget accurately around their mortgage repayments.

The interest rate on the mortgage will remain the same throughout the length of the fixed period – which can be between one and ten years, depending on the product you choose – meaning that you will pay exactly the same amount each month.

Advantages

  • Budget accurately around your mortgage repayments
  • Many products allow you switch to a different deal without any penalty charges once the fixed rate period has ended
  • Your repayments will be unaffected by any rises in interest rates

Disadvantages

  • Your repayments will be unaffected by any drops in interest rates
  • You will be tied in until the end of the fixed period, or face large penalties

TRACKER MORTGAGE

With a tracker mortgage, the rate of interest you pay is directly linked to the Bank of England base rate, meaning your monthly repayments will fluctuate with any changes.

Trackers are often available on terms between two and five years, or over the lifetime of the mortgage length. Many lifetime trackers are penalty free, allowing you to switch to another product should interest rates rise considerably.

Advantages:

  • Interest rates are generally lower than fixed rate deals
  • Lifetime trackers usually allow to you switch to another product without any penalty charges
  • Monthly repayments will become cheaper if the base rate drops

Disadvantages

  • Trackers carry an element of risk – and you should be prepared that your repayments could go up as well as down
  • Some short-term trackers carry penalties if you wish to leave early

DISCOUNT MORTGAGE

Discount mortgages are similar to trackers, except your monthly repayments are linked to the lender’s standard variable rate (SVR) rather than the base rate.

As with discount products, there are deals available over different terms so you can decide how long you are happy to be locked in.

Advantages

  • Interest rates are generally lower than fixed rate deals
  • Your repayments will go down if rates fall

Disadvantages

  • The lender’s SVR is not linked to the base rate – meaning they are able to change it at any time
  • You must budget for your repayments to go up as well as down
  • Many products carry a penalty if you wish to leave during the discount term

INTEREST ONLY MORTGAGE

The number of Interest Only mortgages available has sharply fell over recent years, but they are still offered by some lenders.

For the duration of the mortgage, you will pay the interest on the loan each month. Once the term comes to an end, you will then be required to repay the full mortgage amount.

Many remaining interest only products are only available at a low loan-to-value (usually around 60%), but can be an attractive option if you have a plan in place to grow your mortgage savings over the course of the loan.

Advantages

  • Freedom to cultivate your mortgage pot using savings accounts, investments etc until the time comes to repay the loan

Disadvantages

  • You are solely responsible for ensuring that you have the finances available to repay the loan in full at the end of the term
  • Usually only available to those with a large deposit
  • Many lenders will require you to show a clear plan of how you intend to repay your mortgage at the end of the term

OFFSET MORTGAGE

Offset mortgages allow you to use your savings to reduce the amount of interest you pay on your loan.

A savings account is set up with your mortgage, with any money in the account then “offset” against your mortgage to reduce the amount of interest you pay on the loan.

For example, if you have a mortgage for £100,000 and a savings account with £30,000, you will only pay interest on £70,000 of the mortgage loan.

“What happens when my term period ends?”

Once your mortgage term period has ended, you will often be placed on to the lender’s standard variable rate (SVR).

This rate is often considerably higher than what you will have been paying during the term so you may find your mortgage repayments going up. However, many mortgages will allow you to move to a new product free of charge once your term has come to an end.

When your term is due to conclude, now is the time to shop around for a new mortgage deal to ensure you stay on the best rate.

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