Repayment mortgages, interest only, fixed rate, standard variable rate…. What does it all mean and what type of mortgage is best for you? We take a look in greater depth at the different types of mortgage and what it all means for you.
When it comes to making payments towards your mortgage, there are essentially two types – the repayment mortgage and the interest only mortgage.
Repayment mortgage
As well as the interest of your mortgage, you monthly repayment will be calculated to ensure that you are also repaying some of the capital each month. This means that over the term of your mortgage, the amount outstanding will decrease as each month goes by.
Interest Only Mortgage
In contrast to a repayment mortgage, an interest only mortgage means that you just pay back interest on the amount borrowed. You never actually reduce the capital of your mortgage and when you get to the end of the term, the amount that you owe is the same as at the start. Many people have an additional plan in place to repay the capital at the end of the term or make overpayments over the life of their mortgage to reduce the capital.
An interest only mortgage makes the monthly repayments more affordable than a repayment option however, it means that you are never actually reducing the amount that you owe.
If you have an interest only mortgage, it is a good idea to overpay when you can afford to (avoiding any penalties for repaying too much of the loan) to try and reduce the loan amount.
Fixed Rate vs Variable Rate
There are various options available when it comes the interest rate that you pay. The ’rate’ refers to the interest rate you agree to pay.
Fixed Rate
A fixed rate mortgage generally means that you have an agreed interest rate fixed for 2,3,4 or 5 years. This means that if there is an increase in interest rates, your monthly payment won’t change and you are guaranteed to pay this amount for the agreed fixed term. This is an excellent option if you are worrying about increasing bills and want to know exactly how much you are going to be spending each month. It is important to be mindful of when the fixed term ends as, at this point, you will revert to a standard variable rate and could be paying more than you need to.
You can also get a mortgage that has a fixed term for the life of the mortgage. The downside of fixed rate mortgages is that if interest rates go down, you won’t benefit from a reduced payment.
Standard Variable Rate
The SVR refers to the bog standard base rate applied by the lender. Your lender is free to adjust the SVR as and when they see fit. It is often what happens to your rate at the end of a fixed rate period and often means you are paying more than you could be.
Tracker Rate
The interest rate that your lender charges is entirely up to them and you agree to that rate when you take out the loan however, if the lender decides to change their rate, they can do so. This usually occurs in line with the bank of England interest rates. If rates go up, then your mortgage lender will probably follow suit and decide to increase their interest rate in-line with this. Let’s say you pay 2.5% interest with a Bank of England interest rate of 0.5% then they increase rates to 0.75%. Expect the bank to increase their rates by at least a quarter of a percent too.
Capped Rate Mortgage
A capped rate, as the name would suggest means that while the mortgage is a standard variable rate mortgage, the interest rate is capped at a certain level so that you know you will never pay more than a certain amount.
Other Types of Mortgage
Flexible Mortgage
A flexible mortgage usually comes at a higher price with a higher interest rate but allows you to underpay, overpay and take payment holidays to suit your circumstances.
Offset Mortgage
An offset mortgage uses your savings to reduce the amount of interest you pay on your mortgage. If you have a mortgage of £200,000 but you have £20,000 in savings in a separate account with your lender, you will only pay interest on £180,000 rather than £200k.
Understanding the Different Types of Mortgage
There are so many different types of mortgage and deciding what is best for you can be a struggle. It will largely depend on your circumstances, how they are likely to change over time and what is important to you. With Bank of England interest rates likely to be on the rise, and mortgage lenders increasing their rates, perhaps it’s time for a free mortgage review? Our team of experts are here to help and can offer advice on the best mortgage to suit your needs. Call us on 01934 756717