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Types of Mortgages

Below we discuss the various types of mortgages on offer to give you an insight into your options.

Interest or Repayment
First of all, you need to decide how you want your mortgage repaid.

Do you want to reduce the value of the mortgage as you go along? In which case you should opt for a 'repayment' mortgage.

Or do you want to merely pay the interest off as you go along without paying off the capital element of the mortgage until the end? This is called an 'interest only' mortgage and the monthly payments are obviously a lot cheaper than those associated with a 'repayment' mortgage but don't forget, you will need to pay into another investment vehicle in order to accumulate the amount required to pay off the capital element at the end of the mortgage. Most people address this requirement using an endowment policy.

Wherever possible, you should really consider a 'repayment' mortgage and pay off your debt as you go along rather than rely on another investment to produce the required sum at the required time.

Standard Variable Rate (SVR)
The SVR mortgage is pretty much the old fashioned mortgage where your interest payments are charged at the lender's standard interest rate, which will fluctuate each time the Bank of England changes its base rate.
Advantages: Great if you expect the Bank of England to keep dropping the base rate but who can predict that?
Dis-advantages: If interest rates go up then so do your mortgage repayments, making it difficult to budget.

Tracker
The Tracker mortgage is very similar to the SVR mortgage and only differs in that it has an definitive relationship to the Bank of England base rate. For example, if the Bank of England base rates rises or falls by 1% then your mortgage rate will automatically rise or fall accordingly by 1%

Advantages: Ok if the base rate falls.

Dis-advantages: Not so good if the base rate rises. Once again, makes it difficult to budget.

Discount
A Discount mortgage normally refers to a lower rate of interest for a set period of time, e.g. the first two years. You could get a Discounted SCR mortgage or a Discounted Tracker mortgage. Basically, you pay less interest for a set period of time.

Advantages: It's cheaper than an SVR or Tracker mortgage in the early years.

Dis-advantages: Same dis-advantages as the SVR or Tracker and you may find yourself locked into the SVR for a set period after the discount period has ended.

Fixed
This mortgage will come with a fixed rate of interest for a set period of time - typically 2 to 5 years.

Advantages: Great for budgeting because you always know what you'll be paying.

Dis-advantages: Doesn't allow you to take advantage of any decreases in the Bank of England base rate

Capped
The Capped mortgage is basically an SVR mortgage but with a ceiling above which the interest rate will not be raised. The ceiling rate is the rate at which your mortgage is capped.

Advantages: You can benefit from interest rate falls without over-exposing yourself to interest rate hikes.

Dis-advantages: The initial rate will normally be higher than an SVR mortgage.

Cashback
With a Cashback mortgage you get a percentage cash back, say 5%. It's just a modern day incentive to get your business but it's very useful for those that are in need of a bit of cash to spend on their new property.

Advantages: Money when you most need it.

Dis-advantages: Generally higher interest rates are charged and hefty get-out charges applied.

Offset
The Offset mortgage allows you to link other accounts to your mortgage for the purpose of offsetting the balance of those accounts against your mortgage balance before interest is calculated. Therefore, reducing the amount of interest charged on your mortgage.

Advantages: By reducing the interest charged, you are effectively overpaying your mortgage and will therefore pay it off quicker.

Dis-advantages: Generally the interest rates are higher and therefore your offset accounts need to have a healthy balance in them to benefit from this arrangement.