There are many different types of mortgages available. Each one is simply a different way of borrowing money to fund your house purchase or remortgage.
The links below detail the different types of mortgages available. Rates change daily and so while a product may seem to be right for you in theory the costs do not always add up.
The monthly interest rate will stay the same for a set period of time, for example, between 2-5 years. At the end of the fixed rate period your rate will usually change to the Variable rate.
Advantages
You are guaranteed that your rate will be exactly the same every month for the duration of the fixed rate term - even if other interest rates rise during this period. You can confidently plan your budget for the whole period, because you'll know in advance exactly what your major outgoings will be.
Disadvantages
If other interest rates fall during the set period, then the amount you pay during the fixed rate term may be higher than if you had chosen a mortgage type where the interest rate is allowed to rise and fall. Sometimes arrangement fees can be higher for a fixed rate product.
Variable Rate Mortgages |
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The 'Variable', means either the lender's standard variable rate (SVR) or those rates which track an external rate (such as the Bank of England base rate or LIBOR). 'Variable' means the rate can go up and down.
Advantages
The rate you pay may fall if mortgage rates in the market fall - this means your payments may go down. A variable rate without any special incentives may allow you to repay some or all of your loan without having to pay early repayment charges
Disadvantages
Your payments may increase if mortgage rates rise. So unless you can afford increases in your payments, you may be better off with a mortgage where the rate is fixed for a period of time (giving you time for your income or earnings to increase). The Standard Variable Rate is not usually the most competitive rate.
Capped Rate Mortgages |
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Your payments are linked to a Variable rate which means that payments may go up or down - but the amount the rate can rise to is restricted to an upper limit (known as the 'cap' or 'ceiling') for a set period of time. There is a similar mortgage called a Cap and Collar Mortgage, where the rate you pay does not fall below a lower limit (known as the 'collar' or 'floor'). At the end of the cap (and/or collar) period you are usually charged at the Variable rate.
Advantages
These mortgages provide certainty that the Variable rate charged to your mortgage will not rise above the cap. This means you are protected from significant rises in Variable rates. This will help you to budget. In addition, you will be able to enjoy a lower rate if interest rates fall
Disadvantages
May not be as beneficial as a fixed rate mortgage if rates rise, as the upper limit of a capped rate is often higher than a fixed rate. For example, if the Variable rate rises to the cap level and remains at this level for a significant period of time, then a fixed rate mortgage below this level may have been better value. The variable rate offered is not always the lowest rate available at the time.
Discounted Rate Mortgages |
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Your payments are based on a discounted rate set at a certain level below the Variable rate for a specific period of time, which means your payments may go up or down. For example, a 1% discount for 12 months off a Variable rate of 6.5% would mean a pay rate of 5.5% for 12 months. Sometimes these discounts are stepped over a period of time, for example, a discount of 2% in year one followed by a discount of 1% in year two. After the set period the Variable rate usually applies.
Advantages
Provides you with lower payments in the early years to help with the cost of moving or setting up in your new home. It is a genuine discount in that any benefit does not have to repaid to the lender. A discount that gradually reduces means you do not usually face a significant increase in payments when the discount period ends.
Disadvantages
If interest rates rise whilst you are on a discount, your payments may increase. At the end of the discounted period your rate will always rise.
Tracker Rate Mortgages |
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Trackers are variable-rate mortgages, which means their rates move up and down to reflect the movement of another index. This index is usually the Bank of England's base rate (BBR) or can be the London/European or US inter-bank offered rate. So, for example, if you are asked to pay 0.5% above BBR for two years and BBR stands at 4.75%, this makes the current pay rate 5.25%. If BBR increases to 5% then your tracker rate increases to 5.5%.
Advantages
The main benefit of trackers over other types of mortgage is that they are much more transparent. They are based on an independent rate, so you're not at the mercy of the lender as to how much they reduce or increase your rate. For example, when interest rates increase lenders sometimes add on extra to their SVR on top of what the Bank of England adds to the base rate (0.3% instead of 0.25%, for example), or similarly fail to pass on the full percentage of a drop.
Disadvantages
Unlike fixed-rate loans, trackers don't offer protection from rate increases and you won't have the security of knowing exactly what your repayments will be. Some of the best tracker deals have higher arrangement fees or require a bigger deposit from borrowers.
A flexible mortgage is a home loan that allows borrowers to vary their monthly repayments in line with changing financial circumstances. Many people pick flexible mortgages exactly because they like the idea of choice - whether they end up using the features or not. Although every lender is different the following are standard features available on flexible mortgages.
1. Overpayments
Overpayments allow you to pay more than your agreed repayment, either regularly each month or now and again with a lump sum. If you choose to overpay, your monthly repayments will never reduce, but the term of your mortgage decreases instead. This is the most popular feature of flexible mortgages as ultimately the amount of interest paid will reduce. This option is now also available on many other mortgage types depending on the lender.
2. Underpayments
Underpaying allows you to reduce your monthly repayments for an agreed period. This can be a definite advantage in tight financial periods - perhaps if you've recently had extra expenses or your income is prone to rise and fall.
3. Payment holidays
A payment holiday is a break from paying your mortgage altogether for an agreed period. This facility can be a help if you want to extend your family or take a career break or perhaps even if you have a cashflow crisis eg over Christmas. It is important to note that interest will still be charged to your account so at the end of the holiday your monthly payment will increase.
4. Drawdown
This feature allows you to make a lump-sum withdrawal from your mortgage account. The money comes either from your overpayment reserve or from unused borrowing capacity. The latter is when the amount you originally borrowed was less than the amount you were approved to borrow. Most customers borrow to fund home improvements to increase the value of their property while others might be paying for a child's education or realising long-held ambitions like starting up a business.
5. No Early Repayment Charges
With a flexible mortgage you are not charged when you pay back your mortgage early, making overpayments possible. Some lenders are more relaxed than others about how much you can overpay. However, many lenders will not allow overpayments of more than 10 per cent each year.
6. Daily Interest
Flexible mortgages can offer interest calculated on a daily or monthly basis. The advantage of daily interest is that the benefit of any overpayments can be seen almost immediately.
Not all flexible mortgages offer every one of the features listed above. And many mortgages that don't call themselves 'flexible mortgages' offer some of these flexible features. For more details contact us to arrange a meeting.
Offset mortgages allow you to link your mortgage to your savings or current account, thus offsetting your mortgage against other money.
The advantage of this is that the amount of interest you are charged is reduced, which allows you to cut your mortgage term by several years. For example, if you have a mortgage of £100,000 and savings of £50,000 you will pay interest only on £50,000 of borrowing.
This sounds like a great idea, but an offset mortgage may not be suitable for everybody. Firstly, offset mortgages work best for you if you have substantial savings. You will also not receive any interest on your savings, which is something you need to be prepared for. Ideally to make this work you need savings of at least 20 per cent of your mortgage. Offset mortgages usually carry higher rates of interest, so you need to be able to make up the difference. With offsets, you can choose from fixed rates, discounts or standard variable rates.
Advantages
Despite higher interest rates, offset deals can look attractive to borrowers with large amounts of cash that they don't want to invest elsewhere. They can mean that you pay less tax because the interest you would normally receive from savings may be subject to income tax.
Disadvantages
The main drawback is that they tend to charge around 1 per cent more than other mortgages, so you need to make sure that you can make the most of the features on offer.
Instead of receiving a discount, you receive a single lump sum or cash back generally based on the value of your loan at the time you take out your mortgage. For example, on a £100,000 mortgage with a 3% cash back, you will receive £3,000. Your monthly payments are usually linked to a Variable rate, which may go up and down in line with interest rate changes.
Advantages
It means money in your pocket at a time you may need it most. It can provide you with a very useful contribution to the cost of moving, or helping you pay for the decorating and refurbishment work you may have planned for your new home.
Disadvantages
Because of the lump sum you receive at the start of your mortgage, your rate may not be as attractive as some other mortgage types. The cash back you receive is not usually available to use as a deposit on your mortgage, as it is only generally available after you complete. You will be tied to this lender for a set period, if you wish to switch lenders before that then you will need to repay some of the cashback.
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