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Victoria CranwellLong gone are the days when a homebuyer had a simple choice between a repayment and an endowment mortgage. These days, there is a bewildering choice of products available, and choosing the wrong one can prove expensive. Before contacting a mortgage lender or broker, a little research can be very helpful in understanding the terminology you will encounter, and how each product works. Here, we offer a brief explanation of the types of mortgage you are most likely to encounter.
Fixed rate mortgage
A fixed rate mortgage is a type of mortgage where the interest rate on your loan stays the same for an agreed period. It’s possible to fix your interest rate for the duration of the mortgage, but most people choose to do so for between two and five years. At the end of the fixed rate period, the interest rate usually reverts to the lender’s standard variable rate, at which point you will probably wish to look for another fixed rate deal.
A major consideration if you are considering a fixed rate mortgage is that you will be ‘locked-in’ for the duration of the deal, with penalties for early redemption.
Variable rate mortgage
A variable rate mortgage is one where the interest you pay each month can fluctuate. They come in various forms, including:
- Standard variable rate mortgage – A standard variable rate (SVR) is the standard interest rate charged by a mortgage lender. Typically, the SVR is higher than their fixed or tracker rates. Although the SVR will tend to follow the Bank of England’s base rate, the lender can increase or decrease it at will.
- Tracker mortgage – A tracker mortgage follows the Bank of England’s base rate and is fixed at a certain percentage above that rate. So, for example, if your deal is base rate +2%, and the base rate is 0.75%, you will pay 2.75%. If the base rate increases by 0.25%, you will then pay 3%. Although there are ‘lifetime tracker’ mortgages available for the whole term of the mortgage, most deals run for between two and five years.
- Discounted mortgage – A discounted mortgage is one where you pay the SVR with a fixed amount discounted for a period, usually two or three years. For example, if your lender’s SVR is 4.25% and your mortgage has a 1.25% discount, you will pay 3%. If the SVR increases to 4.5% during the discounted period, you will pay 3.25%.
Offset mortgage
An offset mortgage is one linked to a savings account. It works by ‘offsetting’ the amount of money you need to repay on your mortgage each month against the credit balance in the savings account, lowering the total interest you will be charged. For example, if you have £35,000 in a savings account linked to an offset mortgage with a balance of £185,000, you will only pay interest on £150,000. But it’s important to remember that you will not earn any interest on the savings your mortgage is ‘offset’ against.
Interest-only mortgage
While now rare, it is still possible to obtain an interest-only mortgage. But as you will only pay interest on the loan, the lender will expect you to meet strict eligibility requirements and have a realistic strategy for repaying the capital at the end of the term.
