Mortgage Types

Types of Mortgages

Standard variable rate mortgages

Typically this type of mortgage will mean that your monthly payments will fluctuate in line with your lender's standard variable rate. This is mostly controlled or driven by the Bank of England's base rate. This can be a real advantage to you should the Bank of Englands base rate be very low, as it has been over the past 12-18 months. It can however be a massive problem whould that base rate rise as your monthly mortgage payments could jump by a few hundred pounds. These type of mortgages are generally a more expensive way of borrowing money in comparison to the other options on the market. They do however carry a real plus in that there are no redemption penalties in place, allowing you the flexibility of moving to another lender.

Fixed interest rate mortgages

This type of mortgage will have a fixed rate of interest applied to it for a set period. This means that the amount you will pay month to month will remain the same, even if interest rates increase. The main disadvantage of this mortgage is also the main advantage in that if interest rates go down you will not benefit from the fall. Obviously the main advantage is that you can budget your monthly outgoings and remain confident that your mortgage repayments will not rise to an unaffordable level for you.

A fixed rate mortgage will tend to switch over to standard variable rate mortgage once your fixed rate period ends. This will obviously mean your payments will start to fluctuate. A fixed interest rate mortgage will pretty much always carry with it redemption charges which will make it a harder to move to a new lender if you are not happy with your current lender.

Capped interest rate mortgages

With a capped interest rate mortgage your monthly repayments will fluctuate and can be linked to the base rate. They are however also capped at an agreed level (also known as a ceiling) above which they cannot rise. Like a fixed interest rate mortgage, a capped interest rate mortgage will apply for a set period after which you will more than likely be moved back to your chosen lender's standard variable base rate.

By taking out this type of mortgage your main advantage is that you will have a maximum monthly payment over a set period, BUT you are also in a place to benefit should interest rates go down. Normally this type of mortgage will include early redemption charges and can in some cases include an overhang.

Tracker rate mortgages

A tracker rate mortgage will be based around a variable rate loan that will be set at a percentage above or below the Bank of England or another independent base rate. This will mean that the interest rate you will pay will fluctuate and therefore so will your monthly mortgage repayments. The main disadvantage of this mortgage is also the main advantage in that set interest rate go down you will not benefit from the fall. However if the set interest rate were to rise so would your monthly mortgage repayments. This type of mortgage can include redemption charges and an overhang, so it is important to check this out with your lender.

Discounted interest rate mortgages

A discounted interest rate mortgage will provide you with variable monthly payments, but you will receive a discount on the lenders standard variable rate for a set period. When this set period finishes your lender will normally move you to their standard variable interest rate. You should do your calculations thoroughly before taking this type of mortage to make sure you can afford the repayments when the discounted period ends.

If you take out a discounted interest rate mortgage they will almost always include early redemption charges and can in certain circumstances include an overhang.

Offset mortgages

An offset mortgage works in that it is linked to your main savings or current account at your bank. The way it works is that every month the amount you hold in these accounts is deducted from the balance of the loan before any interest is calculated on the mortgage. If the balance of money in your savings or current account rises, you will then pay less interest on your mortgage. If however your balance should decrease then the interest you will pay will increase.

Flexible mortgages

This type of mortgage give you alot of freedom in that you will have the option to vary or change your monthly payments to best suit your situation. You may have received an inheritance and want to pay your mortgage off early or you may be incurring some financial difficulties and want to decrease the amount you pay on a monthly basis.

Many of the flexible mortgages on the market do not include early redemption charges and you can therefore easily move to a new lender if you wish.