Types of mortgages
Getting the right type of mortgage is a vital aspect when buying your new property. There are many different types of mortgages available on the market for you to get your head round.
Some of the main types available are:
Each lender sets their own SVR so they can vary considerably. Generally this means that if the Bank of England puts the interest rate up or down, your Standard Variable Rate (SVR) will almost certainly follow, though not necessarily simultaneously. If rates go down, you’ll save. If rates go up, so will your repayments – so you need to build some flexibility into your budget if you decide to go for this type of mortgage. The main reason someone may consider this type of scheme is to avoid any early repayment charges if they do not anticipate having the mortgage for long.
This type of mortgage sets the rate you pay below the lender’s SVR for a set period, for example two years or three years. If your discount is two per cent, when the SVR is seven per cent then your mortgage rate will be five per cent. If the SVR rises by one percent, your rate also rises by one percent. At the end of the discounted term, repayments go back to the SVR.
This mortgage follows the interest base rate as set by the Bank of England. It usually stays a set amount above or below this rate for the period of the loan. Some longer-term trackers also offer an initial discount. The benefit of a tracker, as opposed to a discount from the lender’s SVR, is that if the Bank of England reduce the base rate then your rate will reduce simultaneously, whereas if you are discounted from the lender’s SVR, there is no guarantee if, when and by how much the lender will follow suit, as they are not obliged to do anything. Tracker mortgages remove this conflict between you and the lender.
A fixed rate mortgage is a way of guaranteeing your payments for a set number of years. This means that whatever happens to the Bank of England base rate or the lender’s SVR, your payments remain the same. If rates go up you will be better off and if rates go down you could be worse off, but the main benefit is you know what you need to pay each month and can more easily budget for it. Fixed rates can be from one year to the whole mortgage term. Generally, shorter term fixed rates are lower and more attractive, so shorter term rates of two to five years are the most popular.