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Mortgage Types

When arranging a mortgage it’s important to look not only at the interest rate and fees you may be charged, but also which type of mortgage is right for you.

It’s vitally important to understand the pros and cons of the different mortgages available and choose the type that’s right for you. Basically, there are two main types of mortgage, fixed rate and variable rate:

Fixed Rate Mortgages 

As the name suggests, your interest rate stays the same for the length of the deal; which could range from one year up to five years.

You benefit by knowing your monthly payments will remain the same, helping you to budget with no hidden surprises. The disadvantage is that fixed rate deals tend to be slightly higher than variable rate mortgages and, if interest rates fall, you won’t benefit.

When you approach the end of the fixed period, it’s advisable to look for a new mortgage deal a couple of months early or you will be moved automatically to your lender’s standard variable rate, which is generally higher.

Variable Rate Mortgages 

This type of mortgage allows the interest rate to change at any time. It’s important to make sure you could afford an increased payment if rates were to rise. There are a number of different types of variable rate mortgage:

Standard variable rate (SVR) is the normal interest rate charged by your lender and lasts as long as your mortgage or until you take out another deal. If there is a rise or fall in the Bank of England base rate, the interest rate may change. The advantage of this type of mortgage is that you can over-pay or leave at any time; the disadvantage is that the rate can change at any time.

Discount mortgages offer a discount off the lender’s standard variable rate (SVR) for a certain length of time, usually two or three years. So, if if your lender cuts the SVR, you’ll pay less. However, your lender can raise the SVR rate at any time, in which case, your rate will rise too. There may also be a charge for leaving before the end of the discount period.

Tracker mortgages move in line with another interest rate, usually the Bank of England’s base rate plus a few per cent. If the base rate goes up by 0.5% your rate will go up by the same amount and vice versa. Tracker mortgages generally last from two to five years, although longer terms are available.

Capped rate mortgages move in line with your lender’s SVR, but the interest rate can’t rise above a certain level – the ‘cap’. Caps can be set quite high, so you must be sure you could afford the repayments if the rate were to rise to the cap. Never assume that can’t happen!

Offset mortgages link your savings and current accounts to your mortgage. That means you only pay interest on the difference. While you repay your mortgage every month, your savings act as an overpayment and help to pay off your mortgage early.

Some points to bear in mind:

SVRs & pretty much all products differ between lenders, it pays to shop around to find the best rate and incentive deal: Let us take the strain and we’ll do the research for you, typically saving you time as well as money. 

All special deals, apart from an SVR mortgage are likely to incur higher set-up charges and/or interest rate.

If you leave before a special deal ends, an early repayment charge may apply.

Lenders sometimes offer exclusive deals through their own branches only. Mortgage brokers have no access these deals and are unlikely to know the details. We can advise only on products offered on the open market.