Different Types of Mortgage Explained
Researching the best mortgage for you can be a daunting experience; there seem to be so many different types out there it’s difficult to know where to start. For more information, you can have a look at the Mortgage Advice Bureau.
Here is a quick guide to what each mortgage entails.
Repayment or Interest Only?
Whichever mortgage you choose you may have the option of it being repayment or interest only. A repayment mortgage means you pay off the interest and part of the capital each month for around 25 years by which time you should have paid it all off.
If you have an interest-only mortgage you are only paying for the interest on the loan, not the capital. This means your monthly repayments will be lower but you will still have the balance to pay off at the end of the term of the mortgage. You will need a plan to pay this off separately.
Interest only mortgages are increasingly difficult to find as there is a real danger of homeowners finding themselves with no way of paying off their debt at the end of the term.
Find out more about both of these types of mortgage through the dedicated Which? article by clicking here.
Types of Mortgage
As with most types of mortgage, there are clear advantages and disadvantages to a fixed rate option. The interest rate you pay will be ‘fixed’ for a set period: two, five or ten years for example. Usually, the longer the fixed term the higher the arrangement fee.
The advantage of a fixed rate mortgage is that you know exactly what you will be paying for the given period, your repayments will not go up (or down) for the duration of the fixed rate term. This is particularly helpful if you are on a tight budget and need to control your expenditure.
The disadvantage, however, is that the rates are usually slightly higher than variable options and if interest rates fall you will still be paying the higher rate. You must also be aware that there will almost certainly be penalties for early repayment.
There are different types of variable rate mortgage including:
- Capped Rate
Find out more about these two options from the Money Saving Expert right here.
The Discount Mortgage
This is a mortgage with a discount off the lender’s standard variable rate and is usually only for two or three years. SVRs (Standard Variable Rates) can be very different from lender to lender so you would need to shop around.
The advantage of a discount mortgage is that your monthly repayment will be lower and if the lender reduces their SVR rate you will pay less. However, if the lender raises the SVR you will find yourself with higher monthly repayments so you may not know from month to month what you will have to pay.
Like a fixed rate mortgage you might also be liable for a fee if you want to leave before the end of the discount term.
Which? offers an informed take on how this type of mortgage works, please click here for more information.
The Tracker Mortgage
Tracker mortgages are usually tied to the Bank of England’s base interest rate or sometimes another interest rate. If the base rate falls or rises your repayment will too.
These tend to be shorter term deals, between two and five years. Like all variable rate mortgages the advantages and disadvantages are broadly the same; if rates fall so do your repayments but if they rise you will be paying more.
Experian provides a closer look at tracker mortgages here.
The Capped Rate Mortgage
The rate you pay is usually based on the SVR of your lender but there is a cap or maximum rate you cannot rise above. This cap tends to be higher than other variable or fixed rates so you might find yourself with higher repayments than anticipated but you will know what your maximum payment is likely to be.
Whilst capped rate mortgages may seem like a good idea, the Guardian explores why they may not always offer the ideal solution. Click here to find out why.
The Offset Mortgage
An offset mortgage links your savings, current account and mortgage balance so you only pay interest on the difference. You still have monthly mortgage repayments but your savings and current account balance are an ‘over-payment’ that should help you pay your mortgage off faster.
Simoney Kyriakou of the FT Advisor takes a closer look at this type of mortgage right here.
We cannot advise you on the best mortgage solution for your individual situation but we can give you some general advice. It is always worth talking to a trained mortgage adviser and always read the small print; most importantly early repayment fees.
If you find yourself in short-term financial difficulties and are worried about mortgage payments or other money problems we may be able to help.
For a completely independent take on mortgages, please check out the informative Mortgage Solutions website by clicking here.