Standard variable rate

Your monthly payments can move up or down when the lender chooses. The lender may increase or reduce their rate, even if the Bank of England rate doesn’t move at all. This type of mortgages is normally the least complex, as often you find there are no early repayment charges and you can leave the lender without paying any penalties This type of mortgage scheme tends to give you more control as you can pay back extra, thus reducing your interest payments - normally without penalty. It is usually the rate that your mortgage reverts to after a discounted, fixed, tracker or capped rate ends (see below).

Discounted rate

Your monthly payments can still go up or down when the lender chooses, but you get a discount on the lender's standard variable rate for a set period of time. Normally you find that the shorter the discount period the cheaper the rate gets.  At the end of the discounted period, you usually change over to the lender’s standard variable rate. This type of mortgage gives you a cheaper start to your payments, when income may be lower or when other costs like furnishings are higher, but it is important that you check that you can still afford your payments once the discounted rate ends.  Normally you will find that there are early repayment charges and these can apply even after the end of the discounted period.  You may be able to make overpayments to reduce your interest payments but this may be up to a set limit only.

Tracker rates

Your monthly payments can vary as the interest rate that's selected will typically be equal to, or a set amount above or below the Bank of England base rate. It tracks for an agreed period of time (moves up or down with) that rate. This type of rate is normally cheaper than a standard variable rate, but this can vary from one lender to another. Normally after this initial tracking period, it will still revert back to the lender’s standard variable rate. This type of mortgage is usually better for those who believe rates will fall, or those willing to accept cheaper monthly payments now, with the knowledge that they can still afford payments should rates increase.  For those who have a budget that doesn’t stretch to higher monthly payments, this type of rate may be unsuitable. Normally you will find that there are early repayment charges and these can apply even after the end of the tracker period.  You may be able to make overpayments to reduce your interest payments, but this may only be up to a set limit.

Fixed rates

Your monthly payments will be set at a certain level for an agreed period of time.  At the end of that period, they'll usually switch to the lender’s standard variable rate. This type of mortgage is suitable for those who like to budget as it gives you the security of knowing your monthly payment, even if interest rates go up.  You won’t be able to benefit if rates come down during this period however, as your payments will stay the same. Normally you will find that there are early repayment charges during the agreed period of the fixed rate.  You may be able to make overpayments to reduce your interest payments during this period, but this may only be up to a set limit.

Capped rates

Your monthly payments can vary, and often you find they are linked to the Bank of England base rate, but fixed not to go above a set level (the 'ceiling' or 'cap') during the initial period of the deal. At the end of the period you are usually charged the lender's standard variable rate. This type of mortgage is suitable for those who wish to benefit should rates come down, but want the added security of knowing what the maximum they will pay should rates increase.  A capped rate may seem attractive, whilst allowing rates to fall and setting a budget at the same time, but some will have a “collar” or lower limit beyond which your rate cannot fall. Normally you will find that there are early repayment charges, and these can apply even after the end of the initial capped period.  You may be able to make overpayments to reduce your interest payments, but this may only be up to a set limit.

Collared rates

Your monthly payments can vary and this type of mortgage is typically used in conjunction with a capped rate or a tracker rate (see above). Your monthly payments are variable but will not fall below a set lower level (the 'collar').
This type of mortgage is of less benefit when the initial rate charged is set only just above the “collar”. This means any fall in rates will be limited and will not reduce your monthly payments by the full amount due to this lower limit, or “collar”.

Flexible mortgage

Your monthly mortgage payments will tend to be higher on a flexible mortgage, but it gives you the scope to pay off your loan more quickly or to vary your monthly payments, suiting your ability to pay. Many flexible features are becoming more common in mainstream mortgage products and not just mortgages with 'flexible' in their name.  The more common features are listed below:-

• Overpayments – you can pay more than your normal monthly mortgage payment, or pay off a lump sum or both.
• Underpayments and payment holidays – you pay less than the normal monthly payment for a limited period (say six or twelve months). You may even be able to stop making payments altogether (a payment holiday).
• Borrow extra (loan drawdown) – you can borrow extra without further approval from your lender, provided the total loan does not go above an overall set limit. Alternatively you may be able to 'borrow back' against earlier overpayments.

This type of mortgage is often combined with other mortgage schemes (i.e. fixed or tracker), and is more suited to those who have a variable income like the self-employed, or employed people receiving bonuses and commissions. If it is unlikely that you will use these flexible features, then a less flexible mortgage may be cheaper or more suited to your circumstances.

Offset mortgage

With an offset mortgage you can find that your main current account or savings account (or both) become linked to your mortgage, even though held separately with the same bank or building society. You will find that each month the amount you owe on your mortgage is reduced by the balances in these separate accounts, before the interest due on your outstanding loan is worked out.  You will find that as your current account and savings balances go up you pay less on your mortgage interest, and as they go down you pay more.

This type of mortgage is often combined with other mortgage schemes (i.e. fixed or tracker), and is more suited to those who are looking to pay their mortgage off early.  Most offset mortgage providers will maintain the same monthly mortgage payment even though interest rates or the loan may have reduced, effectively causing an “overpayment”. Some lenders will automatically adjust the payment to a lower level however, which doesn’t allow this “overpayment” to be created automatically.

Current account mortgage

A current account mortgage is similar to an offset mortgage in that it offsets the balance in your current account (savings) against your mortgage account (borrowings). In this case however, rather than your mortgage and current account being separate pots of money, they are usually combined into one account.  This means that the combined account acts like one big overdraft against your property.

This type of mortgage is often combined with other mortgage schemes (i.e. fixed or tracker), and is more suited to those who like to manage their finances in one place. Mortgage current accounts normally provide all the normal services associated with current accounts like a  cheque book, access to cash machines and direct debit facilities.  If you have substantial savings and you like the flexibility to make overpayments and underpayments when you choose, then you will find these attractive.  If you have less savings overall then other mortgage schemes (i.e. standard fixed or tracker schemes) maybe more cost effective.

Cashback mortgage

Your monthly payments maybe higher on this type of mortgage, but you are compensated by the lender paying you a substantial sum (cashback) shortly after the loan has started.  This can be a percentage of the loan amount, typically between 2-5% of borrowings - or a fixed amount. If you choose to move to another lender in the early years, most lenders will ask you to repay some or all of the cashback received.

This type of mortgage can be combined with all types of regular mortgage schemes, and maybe suitable for those who require the cashback to cover any costs that may arise early on (i.e. legal costs or furnishings). If the cashback compensates for the fact that monthly payments are higher, then it may be considered for this reason also in isolation.  Those who can forego the cashback now however, will normally get a better overall deal by selecting a different mortgage scheme option.

Adverse credit mortgages

Your monthly payments will be higher on this type of mortgage and is typically available with all mortgage schemes (i.e. fixed or tracker).  These mortgages are often described as non-conforming, sub-prime or adverse credit mortgages.  They are suitable for those people who have had past problems, or are still encountering problems with their credit conduct.
This type of mortgage is more suited to those people with common credit problems such as mortgage or loan arrears, county court judgements, Individual voluntary arrangements, defaults and bankruptcy.

 

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