What types of mortgages are there and how do you choose?
Fixed Rate Mortgages
Discounted Rate Mortgages
Fixed Rate Mortgages
With a fixed rate mortgage your monthly repayments won’t change for a set period of time: two, three, five or 10 years. It’s great if you want to be certain about your mortgage budget and are concerned that mortgage rates could go up.
At the end of the fixed rate period your lender will move you to a standard variable rate – which is usually expensive. You might fix your mortgage at 2%, but the standard variable rate might be 4% or more – which makes a big difference to the monthly cost.
Tracker Mortgages
Discounted Rate Mortgages
Fixed Rate Mortgages
A tracker rate follows the Bank of England base rate of interest. You can fix your tracker to be a certain value above the base rate – typically 1%. It’s often a better rate than a fixed deal, but your repayments won’t be fixed: they could go up or down with the market.
Discounted Rate Mortgages
Discounted Rate Mortgages
Discounted Rate Mortgages
A discounted rate is generally linked to the lender’s standard variable rate – but with a discount. These mortgages don’t track the base rate, it’s the lender’s decision as to whether they increase or decrease rates and by how much.
Offset Mortgages
Repayment Methods
Discounted Rate Mortgages
With an offset mortgage you link your savings with your mortgage to gain a better rate. Many offset mortgages are fixed rate tracker mortgages. Here’s an example of how it works. If your mortgage is £100,000 and you have £10,000 in savings with the same lender, they will ‘offset’ £10k – so you only pay interest on the remaining £90,000.
Repayment Methods
Repayment Methods
Repayment Methods
Capital repayment mortgages
With a capital repayment mortgage, you will totally repay the mortgage loan over the set term – 25 years, for example. Provided you make all the monthly mortgage repayments, at the end of the term you will own your home outright.
Interest only mortgages
Meanwhile, with an interest only mortgage, your monthly payment only covers the interest on your loan – you aren’t paying off the capital at all. At the end of the mortgage term you will still owe the lender the sum you borrowed at the outset. This option can seem appealing as your monthly payments are lower, but you need to have a plan in place to repay the debt when the mortgage ends.
Other Features
Repayment Methods
Repayment Methods
Flexible mortgage features
Some people see good benefits from flexible mortgages, which allow you to make overpayments, underpayments and sometimes take breaks from paying your mortgage.
There is usually some flexibility within most mortgages, however. It’s good to have an idea of the flexible features that are important to you, such as:
Overpaying:
Most lenders will allow you to overpay on a mortgage. Fixed rates deals are often the strictest, allowing up to 10% a year without penalty, while other types have higher limits. Overpaying is a good way to reduce the length of your mortgage, paying the debt back more quickly.
Payment breaks:
Many lenders will also allow you to take a payment break, as long as you arrange it in advance and have a good record for paying on time in the past. If you have also made overpayments, you’re more likely to be accepted.
Porting:
If you have a fixed mortgage rate but you’re looking to move house, with a portable mortgage you can move your loan to a new property. It can be topped up with a second loan from your lender to cover any difference in house prices.
While these are some of the most popular mortgage types and options, there are many more products available to suit different kinds of customers and their needs. Examples include Help to Buy mortgages and Equity Release.
Whatever your property plans are, Bespoke can help you find the most suitable products to achieve your goals – and take the strain out of applying for them.