For most people, a mortgage represents the biggest type of financial transaction made in life, and as such, it’s important to find a product that’s right for you.
There’s a lot of jargon in finance – and mortgages are no different. So we have teamed up with the guys over at Your Property Wizard who provide a range of services including home reports in Glasgow to help you understand the different types of mortgage and some of the associated terms you’ll hear – to make sure you’re choosing the product that’s 100% right for you.
Mortgages can be sorted into two broad types; ‘fixed’ and ‘variable’ rates. What this essentially means is that the interest you pay will either be set a definite amount for a period of time (normally for up to 5 years) – or it could fluctuate, hence, ‘variable’.
Both fixed and variable rate products have their pros and cons, so we’ll take a closer look:
Fixed rate mortgages
You’ll generally see these mortgages advertised as ‘Fixed for 5 years” or similar. This means that no matter what happens to the country or bank’s interest rates, the amount of interest the mortgage accrues stays the same, meaning your payment stays the same.
- Having a fixed amount for a certain time period really helps people budget, giving you some certainty around your monthly expenditure
- If interest rates go up, you’ve locked your repayments at a lower rate
- The interest rate you get will normally be a bit higher than that of variable rate mortgages
- If overall interest rates fall, you remain paying the higher rate you ‘fixed’
Questions to ask
- It’s worth asking what happens if you choose to settle or find another mortgage in the ‘fixed’ period. Banks offer these rates to ensure they’ve got your funds coming in consistently for a period of time, so they’ll often charge you if you change your mind – and the charges can be large.
- Finding out what happens at the end of the fixed period is also important – as standard practice would have you transferred to what’s known as the ‘standard variable rate’ – the bank or building society’s most basic interest rate. This is normally higher than what you’ve been paying, so your payment could go up. Start planning your next move a few months in advance.
Variable rate mortgages
Choosing a variable rate mortgage means the interest rate could be subject to change at any time. If this is the type of mortgage you opt for, it’s important that you’ve got some additional funds available to pay the monthly amount, should it suddenly go up.
There are different types of variable rate mortgage, they are:
Standard Variable Rate
This is the most basic mortgage product offered by a lender and is usually only impacted by the Bank of England’s base rate. There’s no time limit associated with this kind of product.
- You’re never locked in to a SVR product, meaning you’re free to shop around for other products as you choose – and will have no penalties to pay if you want to change.
- Your monthly repayment could go up (or down) – which makes budgeting difficult.
A tracker mortgage is normally aligned with the Bank of England’s base rate – usually with a few percent added on top. So, people with tracker mortgages will have seen their interest rate go up by 0.25% in line with the Bank of England increase in October 2017.
- Tracking doesn’t just track upward – which means any decreases in interest rate are also reflected in your monthly payment.
- Increases in base rate will see increases in your monthly payment – and if you’re locked in to the mortgage there’s a chance you’d have to pay an early settlement fee if you wanted to move to a different product.
This type of mortgage fixes a discount that is in relation to their SVR. So as an example, a SVR of 5.5% with a 1.5% discount would see you fixed to an interest rate of 4% for the time you’re fixed. It’s important to understand what the SVR is to begin with though – as big discounts are only good if they drop the final interest rate lower than competitors.
- Works out cheaper than SVR mortgages
- Any decrease in the SVR is likely to be reflected in the rate and your payment
- If the SVR or Bank of England base rate goes up – so does your payment
- There are usually early repayment fees associated with this type of mortgage
A capped mortgage is similar to a tracker product – although an interest rate cap means your rate (and therefore repayment) will never exceed a certain level.
- You’ll be able to calculate a maximum monthly figure that your mortgage could rise to – and it will never go higher while you’re on the product.
- Your rate can still fall – it just won’t rise.
- The cap is often set very high – meaning it’s sometimes unlikely that the rate would ever exceed the cap anyway
- The rate can be increased as high as the cap at any time, meaning you should be sure you can afford any payment that could occur
- The lender could put the interest rate up at any time
Offset mortgages are a more recent product than a lot of others on our list – and they work for borrowers who have savings and a mortgage with the same lender.
In effect, you only pay interest on the different between the amount you owe and the amount you have in a savings account – so, if you have £20,000 saved and a mortgage of £220,000 – you’ll be paying interest on £200,000, rather than the full amount.
- Your savings work in your favour, essentially acting as an overpayment while they’re held by the lender
- It’s important to do the maths on this type of product to make sure you’re getting the most from your money
Make sure you truly compare
You’ll notice there’s been ‘fees’ mentioned quite a lot through this comparison – and it’s important you don’t forget or overlook those fees.
Fees can be applied either when you secure the mortgage product you want – or should you decide to settle the mortgage early. They can be large – sometimes a percent of the interest owed at the point of repayment, so make sure you understand what they are prior to committing.