Type of Mortgages – Know Which Mortgage is Right For You
Choosing the right form of mortgage might save you thousands of pounds, but it is very important to learn how it operates. When taking out a mortgage, you can fix the interest rate for a defined amount of time. The mortgage interest rates can be fixed (for a period of time) or variable (may increase or decrease).
What are the different types of mortgages available?
There are two major forms of mortgages:
- Fixed Rate: The interest paid will remain the same for a fixed period of time, usually between 2 to 10 years.
- Variable Rate: the interest you pay can change.
Fixed Rate Mortgages:
‘Rate’ applies to the interest rate. In the case of fixed mortgage rate, the lender promises that the interest rate will remain the same for a fixed length of time , which is usually anywhere from 1–10 years. When this initial phase expires, you will be moved to the default rate of the lender (or standard variable rate).
- Peace of mind, the monthly expenses will remain the same, helping you budget your monthly expenses..
- Fixed mortgage products generally come with an early repayment charge if you are to pay off the mortgage before the end of fixed term.
- You cannot get benefits if interest falls.
Variable Rate Mortgages:
With variable-rate mortgages, the interest rate can adjust at any time.
Be sure you have some money put aside so that you can afford to raise your expenses if the prices rise in the future. Variable mortgage rates come in different forms:
Standard Variable Rate (SVR):
SVR is the default, bog-standard interest rate of the loan – no offers, bells or whistles attached. Each lender is free to set up their own SVR and change as and when they like it. Technically, there’s no mortgage called an ‘SVR mortgage’ – it’s basically what you could deem a mortgage out of the contract era. Since their contract has expired, a number of people have defaulted on the SVR mortgage, which could not be the right rate for them.
- Freedom – you may overpay or change the product or lender at any time.
- Your rate may be changed at any time during the loan period.
This is a discount off the regular variable rate (SVR) of the loan that extends only for a certain amount of time, normally two to three years.
It is important to compare the SVR with other lenders before deciding to go for a discounted mortgage because the SVR can be different to all the lenders and the discount available can work differently to other lenders in comparison. For example: a discounted rate of 2% on 5% SVR might be more expensive than 1.9% discounted rate on 4% SVR (depending upon product fee and term).
- Cost – the pace starts cheaper and holds monthly repayments smaller.
- If the lender cuts his SVR, you will pay less per month.
- Budgeting – the lender’s SVR can increase at any moment and therefore, the monthly repayment.
- If the Bank base rate increases, you will probably see a spike in the discount rate too.
Tracker rate is a form of interest rate where the rate is affected by the Bank of England base rate. It is usually the Bank of England base rate plus a set interest rate. If the base rate reduces then the tracker rate reduces and when the Bank of England base rate increases then the tracker rate also increases.
- If the Bank of England base rate decreases, the mortgage payments will fall.
- When the base rate rises, the interest payments will rise.
- You may have to pay early repayment if you wish to change lender before the contract expires.
Capped Rate Mortgages:
It is a type of SVR mortgage but the only difference is that the interest rate is capped to a certain percentage and it can not increase from the capped interest rate.
- Certainty-Your rate is not going to increase past a certain rate.
- Cheaper-reduced monthly repayment if the interest rate goes down.
- Your lender may change the rate up to the cap amount at any point.
First Time Buyer Mortgage:
Although first time buyers are free to pick every mortgage product on this list (with the apparent exception of buy-to-let), certain lenders may have some products which are only for those trying to get on the property ladder for the first time.
A way to leverage your savings to reduce the interest you pay on your mortgage. You have to convert your mortgage into an offset mortgage, then open a savings account with your mortgage lender and connect the account to your mortgage (subject to lenders criteria).
Buy To Let Mortgage:
Buy to let mortgages exist for people who are trying to purchase property with the intention of renting out the property rather than staying in it themselves. The calculations used with the Buy-to-let mortgage will vary from any of the above since the lender will usually consider the amount of rent the property is going to make before determining how much they are able to lend.
Mountview FS can advise on mortgage & insurance and can also provide the information and guide which type of mortgage is right for you. For more information, you can call us @ 02080950120 or send us your requirements at email@example.com!