The following is a brief description of the different types of mortgages available.
Standard Variable Rate Mortgage
A standard variable rate mortgage is based on the lenders basic mortgage rate, normally known as the standard variable rate.
This is the rate that mortgages normally revert to after a fixed, capped, discount or tracker period ends.
This mortgage is seen as the least complex mortgage type with the interest rate rising and falling normally in response to changes in the Bank of England base rate.
The base rate is set by the Bank of England and lenders are free to decide for themselves the amount they alter their own interest rates by in relation to the movements in the base rate.
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A discounted rate mortgage offers a percentage discount from the lenders normal standard variable rate for a set period of time.
When the standard variable rate changes, the discount will remain constant, the amount of discount and the period will vary from product to product.
Discount periods can last from as little as six months up to about five years and generally the shorter the period of discount, the higher the discounted rate will be.
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With a base rate tracker mortgage the rate of interest is tied to a particular base rate.
Typically the tracker rate is set as a percentage above or below the base rate.
If the base rate falls, the interest payments on your mortgage loan will fall accordingly, no matter how low the base rate goes.
However remember the base rate can rise as well as fall making interest payments higher which makes budgeting more difficult.
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A fixed rate mortgage provides guaranteed monthly mortgage payments for a selected period of time.
A fixed rate mortgage suits people who wish to know exactly what their monthly mortgage payments are enabling them to control their budget better.
A fixed rate mortgage sets the interest rate payable for a specified period.
A capped rate mortgage puts a maximum pay rate limit on the interest rate you have to pay giving you the comfort of knowing the rate will not rise above that limit.
The capped mortgage interest rate can also decrease giving you the benefit of lower interest payments when interest rates are falling although the lender will normally put a collar on the interest rate meaning it would not drop below a pre agreed rate.
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Cash back mortgages are often aimed at people who require a cash back lump sum to be used for purchasing costs or home improvements.
The amount of cash back varies from a set amount to a % of the mortgage loan.
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There are varying degrees of flexibility that encompass the following.
Overpayments
By making overpayments that are within the lenders criteria it is possible to save yourselves money by paying off the mortgage early. There may be a limit to how much you can pay and fees may apply.
You can also reduce the term of the mortgage by making overpayments.
Underpayments
A truly flexible mortgage will allow you to pay less than your normal monthly payments once you have built up a overpayment reserve.
By taking the underpayment facility it means you will lose the benefits of overpayments you have made.
Payment Holidays
Some flexible mortgages allow you to take a complete break from making your normal monthly mortgage repayments for an agreed period of time. (As defined by your lenders criteria).
To do this you must have to have built up sufficient overpayments to cover the payment holiday period.
Borrowing Back
Borrowing back overpayments you have made makes sense if you need extra cash. The benefit of mortgage overpayments is that rather than putting any spare cash into a savings account and earning a couple of per cent interest rate on it, because the amount you overpay is taken off your mortgage you are effectively earning the mortgage rate on your savings.
Redemption Penalties
Redemption penalties do not normally apply to regular standard variable rate mortgages, so you are free to change when the rates are not the most competitive.
There may be some short term penalties of certain mortgage products during the special rate period.
Calculating Interest Daily
Fully flexible mortgages have interest calculated daily, and any payments and overpayments are credited to your mortgage account as soon as they are paid, so you are immediately paying interest on a smaller amount of debt. This saves you money in interest charges that would add up over a number of years.
Some so called flexible mortgages may only meet a couple of these criteria, while other mortgages allow you to do much more. So make sure you seek expert advices before selecting a mortgage product that best suits your needs and requirements.
When a lender offers a mortgage deal the likelihood is that an early repayment charge could be payable in the event of repayment of the mortgage before the deal ends. Details would be provided when assessing your mortgage needs and requirements.
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