The Different Types of Mortgages

For the most part the interest rates advertised from lenders are introductory offers; every mortgage lender has a standard variable rate (SVR) which usually floats ~2% above either The Bank of England Base Rate or London Interbank Offered Rate (LIBOR). The different types of mortgage available are variations based around the length and security of the initial rate in the hope that one of the options will suit your requirements. We’ve outlined the most popular types of mortgage below, if you would like to know which option would best suit you get a mortgage quote and an impartial expert will advise you.

Fixed Rate Mortgages

With a fixed rate mortgage the Lender will fix the interest rate for a set period of time eliminating the risk of sudden interest rate rises, the down side is obviously if the lenders interest rate drops you'll be stuck paying a higher rate of interest. Fixed rate mortgages are usually offered for a term between two and five years although longer term deals are available. The fixed repayment means budgeting is easier making it popular with first time buyers and those looking to avoid any nasty surprises but you could easily find yourself paying over the odds.

Lenders will usually apply an early repayment charge to fixed rate mortgages in an attempt to lock borrowers in for the term of the fixed rate. The penalty could be as much a six months interest.

Capped Rate Mortgages

Capped rate mortgages are similar to fixed rate mortgages in the respect that if the lenders interest rate increases the pay rate will be fixed or capped at an agreed amount but with the added benefit that if the lenders interest rate drops the pay rate drops too. This makes the capped rate mortgage favorable over an equally stacked fixed mortgage. Expect reasonably high upfront costs and early repayment penalties.

Discount Mortgages

A discounted rate mortgage applies a discount to the lenders SVR for a set term, for example if the lenders SVR is 5.5% and the discount rate is 1.5% the initial pay rate is 4%, if the lenders SVR rose to 6.75% the pay rate would be 5.25%. Be prepared for the end of the introductory term, some short term discount mortgages can offer as much as 4% meaning a difference of £270 a month extra on a repayment mortgage of £120,000 at 6% over 25 years. Overhung early repayment charges are also common to protect the lenders low initial rate.

Variable Rate Mortgages

With a variable rate mortgage the pay rate simply reflects the lenders SVR, as the market fluctuates as will your monthly payments. It's a basic form of repayment mortgage and providing your credit score isn't too bad you should avoid paying the lenders SVR in favor of a lower rate.

Tracker Mortgages

A tracker mortgage is designed to track a variable interest rate, be that The Bank of England Base Rate or the London Interbank Offered Rate (LIBOR). The mortgage will have an agreed increment applied which will be added to the relevant base rate to determine the pay rate. For example if the tracker mortgage is +1% above the base rate of 4.5% the rate payable will be 5.5% adjusting as the base rate fluctuates for the agreed term.

Flexible Mortgages

A flexible mortgage allows you to adjust the amount you repay on your mortgage without penalty. In most cases the lender will require you to build up a reserve of overpayments before allowing flexible payments or even payment holidays. Flexible mortgages are most beneficial if you’re in a position to regularly overpay on the monthly repayment, as the faster you repay a mortgage the less it costs. For example, a 25 year repayment mortgage of £150,000 at 6% interest could be paid off 5 years early by paying an additional £100 a month, a saving of £30,000 in interest!

Offset Mortgages

An offset mortgage or current account mortgage (CAM) shares a lot of the features and benefits of a flexible mortgage but with the added advantage that you don't have to spend your savings. The mortgage works by offsetting the money in your savings or current account against your mortgage. For example if you have a outstanding mortgage balance of £75,000 and you have £2,000 in your saving account then you'll only pay interest on £73,000, you won't receive any interest on the money in your current account and most lenders require you to keep you savings or current account with them. Because all of your financial responsibilities are in one place it's easy to budget but expect to pay slightly higher interest rate making this mortgage only really beneficial for those with large savings.

Cash Back Mortgages

A cash back mortgage 'does what it says on the tin', they are usually used as an incentive to cover the lenders arrangement fees but it's not uncommon to receive a lump sum upon completion of the mortgage application. Cash back incentives vary from lender to lender but can be anywhere from a few hundred pounds to 6% of the mortgage amount. For example borrowing £90,000 on a 6% cash back mortgage would result in a lump sum of £5,400! It may look attractive but lenders aren't going to just give this money away, in order for the lender to recoup the cash, this type of mortgage attracts high early repayment charges usually locking you into the mortgage for 5-7 years where the cash back has been substantial.