A guide to mortgages, and discover which is best suited for you.
Discount Rate Mortgages
These loans help reduce your monthly costs in the early years by setting your interest rate at a few points below the lenders Standard Variable rate (SVR). Your monthly payments may still move up but the difference between your rate and the SVR remains constant.
Plus Points: The discount helps free money for other expenses, such as new furniture or redecoration just when you might need it the most.
Points to Watch: When the discount period comes to an end, the loan will revert back to the SVR, which may be a big leap in what you are used to paying. Sometimes these loans carry early redemption fees, which will offset any benefit of savings made in the beginning if you should move or redeem your mortgage early on.
Fixed Rate Mortgages
A Fixed Rate Mortage offers you a mortgage with an interest rate that is set for a period of time. The rate then reverts to the lender’s basic mortgage interest rate, commonly known as the Standard Variable Rate (SVR).
Plus Points: Knowing the interest instalments will not fluctuate during the fixed period allows you to plan your finances.
Points to Watch: These mortgages sometimes have early cancellation penalties that can lock you into staying with the lender for a time after the fixed period. This could then tie you into an uncompetitive mortgage. There are 2 standard repayment methods for Fixed Rate Mortgages : Straight Repayment; Interest Only.
A flexible mortgage allows you to vary your monthly repayments. Depending on the flexibility of the particular mortgage, you can, without charge:
Make over or underpayments each month (e.g. you know you will have high expenses in April, so choose to underpay that month).
Make a lump sum repayment (e.g. if you receive a bonus and decide to put it all into the mortgage).
Take a payment ‘holiday’ (you might want to pay for a car or a holiday and need to take a break from your mortgage payments for a while).
The flexibility is conditional – usually you have to follow (or exceed) a predetermined repayment schedule.
Top Tip: Look out for a mortgage which may not officially be “flexible” but still allows the ability to make overpayments.
Interest Only Mortgages
With an interest only mortgage, your monthly payments to the lender cover only the interest element of the loan (i.e. you don’t pay back any of the capital). The full amount of the loan has to be repaid to the lender at the end of the term. To do this you invest additional funds on a monthly basis which are set at a certain growth rate to repay the loan at the end of the term.
Plus Points: You can choose a variety of investment vehicles such as Endowments (which usually has built in life cover), ISAs (Individual Savings Account) or a Pension for which some have great tax advantages. If you should remortgage or move, your investments can generally be reallocated to the new mortgage along with your reducing mortgage term.
Points to Watch: Unlike a repayment mortgage, the amount of debt does not reduce over time. And there is no guarantee that your chosen investments will grow sufficiently to repay the loan. However you can top up your investments as you are going along if this looks likely to be the case.
Like current account mortgages, offset products allow you to offset the balance of your mortgage against any funds in a savings and/or current account held with the same lender, and pay interest (calculated on a daily basis) on the net balance between the accounts.
More and more UK homeowners are moving their mortgage to save money. Which is a good thing, considering that mortgage rates have dropped considerably over the last few years. In simple terms, remortgaging involves switching your current mortgage to a new deal, arranged either with your existing lender or with a new lender.
A tracker rate gives you the certainty of knowing the rate you pay will move automatically in line with Bank Base Rates. You benefit straight away from any reduction in Bank Base Rate, even if the lender delays reducing its standard variable rate to reflect the reduction. Tracker rates often track Bank Base Rate by a certain percentage, e.g. Bank Base plus 0.75% for the full term of the mortgage.
Plus Points: A tracker rate means that you immediately benefit from any reduction in Bank Base Rate – which is particularly beneficial in times of low Base Rates.
Points to Watch: If Bank Base Rate increases your interest rate will also move up, will those on capped or fixed rates keep their low rate for longer.
Variable Rate Mortgages
Variable Rate Mortgage offers you a mortgage at the lender’s basic mortgage interest rate, commonly known as the Standard Variable Rate (SVR), which can fluctuate with interest rate changes made by the Bank of England.
Plus Points: Usually there are no penalties for cancellation and for transferring to another mortgage product or to another lender (known as redemption penalty and lock-in periods), giving you the flexibility to change your mortgage type or move to a different lender.
Points to Watch: Interest rates can go up as well as down. When it rises sharply, your interest payment instalments may increase substantially. There are 2 standard repayment methods for Variable Rate Mortgages : Straight Repayment & Interest Only.