Looking for a mortgage can be a daunting and confusing task. With so many types to choose from, and a massive number of providers it can be difficult to know where to start. This basic breakdown of the main mortgage types should help get you off to an informed start
Standard variable rate mortgages
With this type of mortgage the lender is able to move the variable rate of interest which is often (but not always) in-line with the Banks of England's base rate. This means your payments can fluctuate both against and in your favour.
It's worth mentioning here that rates can vary greatly between providers so you should shop around to get the best deal.
Standard variable rate mortgages are one of the more expensive options, but they give you greater flexibility over others as there shouldn't be any redemption penalties. This means that'll you'll be free to switch lenders or pay off your mortgage in full without being fined.
Fixed interest rate mortgages
The basic opposite to variable rate; you pay a fixed rate of interest over a set period of time. This also means that your payments are a constant amount, so you'll neither benefit nor be penalised by fluctuations in the base rate. Naturally this makes it easier to budget, pending any disasters, and can be a lower risk if your repayments are pushing you close to the breadline.
A big advantage of this type of mortgage is that it can make it easier to budget as you'll know exactly how much you'll be paying each month.
A couple of obvious disadvantages with this type of mortgage include; your provider being able to switch you to their standard variable rate, once the set period has ended and early redemption penalties if you wish to change providers or products.
Tracker rate mortgages
Tracker rate mortgages have variable rates which are normally set at a percentage above or below the Bank of England base rate. When the base rate fluctuates, the tracker rate also rises or falls – but at a proportionate level as to it's original position to the base rate.
As a result payments can rise or fall, but rates are strictly in line with the Bank of England base rate, and not dictated by the lenders, so you could take advantage of economic situations, paying off larger chunks of your mortgage at a lower interest rate.
Capped interest rate mortgage
Capped interest rate mortgages are effectively variable rate mortgages, but they are capped not to rise above a certain 'ceiling'. This gives you a bit of both worlds; hopefully enjoying some drops in interest rates along the repayment route, whilst being safe in the knowledge that payments will still be within an affordable level if they rise.
Discounted interest rate mortgages
These types of mortgage offer a discounted interest rate, below the lender's’ normal variable rate, for a set time. This will normally be around two to three years.
Once it's over, you're likely to be moved to the lenders standard variable rate of interest. The interest rate could be lower in this instance, but there is no guarantee that the lender will set their rate in-line with the Bank of England base rate when it comes to standard variable mortgages.
A flexible mortgage enables you to change or vary your monthly payments according to your needs. This normally comes at the cost of facing higher interest rates than with other mortgages.
However, if you're able, you can even clear off larger chunks of the balance, effectively lowering the amount of interest that you have to pay on your mortgage overall.
Flexible mortgages contain a number of 'perks' less commonly found with other mortgages, such as being able to over or under pay, as well as payment holidays and additional borrowing.
Many are free of early redemption penalties too, giving you flexibility to switch providers as well.
If you're a dedicated saver, offset mortgages might be for you. They allow you to link your mortgage to your bank account, which means you get lower interest rates the higher your balance is.
Arrangement fees and interest rates can be high if your funds fall between a certain level, so whether this is a good option for you depends on how you manage your monthly finances.
Quite simply, you're awarded cash by redemption after is has completed. The amount you'll get will depend on the mortgage provider/product, the value of the mortgage and the size of the deposit originally laid down.
It's perhaps a convenient way of saving for the future, but generally interest fees can be quite high, as well as arrangement fees and early redemption charges making it even more costly.Image: © Flynt | Dreamstime.com