Mortgage Types Explained: Which one is best for you?

There are many types of mortgage available in today’s market and knowing which one suits your needs best is essential before you start looking for a mortgage deal.

Mortgages generally fall into two categories: fixed-rate deals (which guarantee your rate for a set number of years), and variable-rate deals (where your rate can go up or down depending on economic conditions).

This article explains the different types of mortgages available and the pros and cons of each one.

 

Fixed Rate Mortgage

Fixed-rate mortgages are the most common type of loan taken out by homebuyers and by homeowners remortgaging. With a fixed-rate mortgage, you’ll pay the same interest rate for a set number of years, meaning your monthly repayments will remain consistent regardless of what happens to the Bank of England base rate.

Pros: This can give you peace of mind and a better ability to budget as your monthly repayments remain the same.

Cons: You won’t benefit if interest rates fall and you could end up paying more than the Bank of England interest rate.

 

Tracker Mortgage

A tracker mortgage is a type of variable rate mortgage that is based on the Bank of England’s base rate plus a set percentage on top. For example, the base rate is currently 5.25%. So if your tracker is ‘base rate plus 1%’, you’ll pay a rate of 6.25%.

In essence, the monthly repayments with this kind of mortgage will get bigger or smaller depending on whether the base rate goes up or down.

Pros: If the Bank of England base rate falls, so will your mortgage payments.

Cons: A rise in the Bank rate will result in an increase in your mortgage payments. Plus, you’ll lack the certainty that comes with a fixed-rate mortgage of knowing exactly how much your repayments will be for a certain period of time.

 

Standard Variable Rate (SVR) Mortgage

A standard variable rate (SVR) mortgage has an interest rate that is set by the lender. This rate is not directly linked to the Bank of England, though in the majority of cases, it is the primary influence on whether it increases or decreases. You usually automatically move onto your lender’s standard variable rate when the mortgage deal you have been on comes to an end.

Pros:  It gives you freedom as a standard variable rate SVR mortgage doesn’t lock you in so you can leave at any time without paying exit fees.

Cons: Your rate is higher than most other mortgage deals and can change at any time. Plus, as with a tracker mortgage, you lack the certainty you’d get with a fixed deal.

 

Interest-only Mortgage

An interest-only mortgage is where you only pay the interest each month rather than repaying the loan itself. This usually makes it cheaper as your monthly payments are lower than on a repayment mortgage. However, when you come to the end of the term you will still have a large loan to pay off.

Pros: Monthly payments are cheaper as you are not paying off the cost of the property.

Cons: At the end of the term, you’ll still owe the original amount you borrowed from the lender, which you will usually need to pay as one lump sum.

 

Discount Mortgage

Discount mortgages are variable-rate deals that charge the lender’s SVR minus a fixed margin. So if your lender’s SVR is 5% and your deal charges the SVR minus 2%, you’ll pay a rate of 3%. If the lender puts up its SVR (for example, if the base rate goes up), your payments will go up accordingly. But if the SVR goes down, you’ll pay less. Discount mortgages usually come with introductory deal periods of two years.

Pros: Your rate will remain below your lender’s SVR for the duration of the deal.

Cons: The lender could change its SVR at any time, so your repayments could become more expensive.

Are you a first-time-buyer or looking to remortgage? Contact Principle Finance today on 0330 107 1558 or [email protected]

 

As a mortgage is secured against your home, it may be repossessed if you do not keep up the mortgage repayments. This site is intended for UK residents only and the laws of England are applicable.