Different types of mortgages to consider
We know that finding the right mortgage can be difficult and a bit scary, which is why we’ve created a guide to the different types of mortgages to consider:
While there are many different types of mortgages to consider, they commonly fall under one of two types of mortgage: the fixed rate mortgage and the variable rate mortgage.
Fixed rate mortgage
With this style of mortgage, you pay the same rate of interest for the duration of the agreement, and this means you make the same payments every single month. This style of mortgage is available for a set period of time, such as a two-year deal or a five year fixed rate mortgage.
The advantage of this style of mortgage is that you know exactly what you have to pay each month.
Variable rate mortgages
With a variable rate mortgage, the interest rate can change at any time, which means the amount you pay each month can differ. If interest rates fall, you will pay less on your mortgage for that month and if interest rates rise, you will pay more on your mortgage.
There is a broad range of variable rate mortgages to choose from:
Standard variable rate mortgage (SVR)
This is the normal, or standard, interest rate provided by your choice of lender and if you have this style of mortgage, it will remain in place until you switch mortgages or your mortgage concludes.
Discount rate mortgage
This is a mortgage based around a lender’s SVR but with a discount applied for a certain amount of time. This allows you to save money but it is important to review your options because there are many different deals on offer from different lenders.
You also need to focus on the overall rate, not just the discounted rate. As an example:
If Bank Y has a SVR or 6% and offers a 2% discount, you will pay 4%
If Bank Z has a SVR of 5% and offers a 1.5% discount, you will pay 3.5%
The discount offered by Bank Z is smaller but due to the lower SVR, it provides the most attractive rate from the two lenders.
Tracker mortgages
This style of mortgage is one that moves in line with another rate of interest. Like other variable rate mortgages, if the interest rate falls you can pay less but if the interest rate rises, you will pay more on your mortgage payment. Other mortgage types to consider include:
- Capped rate mortgage where the rate will not rise beyond a set level
- Cash back mortgage where the borrower receives money back at the start of the agreement
- Offset mortgage where your savings and current account are linked to your mortgage, with holders only paying interest on the difference between the two
While it may seem complicated, it can be relatively simple once you start to understand how they differ. The best start is to get the help of a mortgage advisor, who will not only know the best type of mortgage for you, but will help you get the best rate too.