What Different Types of Repayment Mortgages Are There?
Standard Variable Mortgages
Standard Variable Rate or SVR is a type of mortgage where the interest rate can change, affected by the Bank of England prime rate. Each bank sets its own standard variable interest rate which is usually two percentage points higher than the BoE base rate. The SVR is one of the most popular types of mortgages available with many leading lenders offering at least one, and sometimes several different rates and terms to choose from.
You are more likely to continue with this type of mortgage after you are done with a fixed, tracker, or discount rate mortgage.
A lender can raise or lower their default interest rate at any time, and as a borrower, you have no control over what happens to them.
The advantage of this type of mortgage is that you are generally free to overpay or switch to another mortgage deal at any time without having to pay a penalty fee. Another benefit is that the interest rate will usually go down if the Bank of England’s base rate goes down. The disadvantage is that the rate can go up at any time which is a concern if you are on a tight budget. The lender is free to increase the rate at any time, even if the BoE base rate does not go up.
Fixed rate mortgages
A fixed rate mortgage means that the interest rate is fixed for the life of the deal. Fixed rate mortgages are suitable for those who like to budget and prefer to know exactly what their monthly outgoings will be. You don’t have to worry about general increases in interest rates, and you can be safe in the knowledge that your payments won’t go up during the fixed rate period. An early settlement fee may apply if the mortgage is paid off within the specified period.
In addition to standard variable rate and fixed rate mortgages, there are a few other types that you may want to consider before selecting the right one for you. You can even combine a few options.
Variable discount mortgages
Basically a discount mortgage offers an introductory deal. This type of loan is cheaper than the standard variable rate at the beginning of your mortgage. It allows you to take advantage of the discount for a set period of time at the beginning of the mortgage, usually the first two or three years. When the specified period ends, the interest rate will be higher than the standard variable rate.
The introductory discount rate is as variable as the rate that follows it, so be aware that, just like a standard variable rate mortgage, the amount you pay is likely to change in line with the BoE base rate over the life of the mortgage. Also be aware that the discount offered at the beginning can be very good but you need to look at the total price that is offered.
An early payment fee may apply if the mortgage is paid off within the discount period.
Mortgages tracker
With a Tracker Mortgage, the interest rate is linked only to the Bank of England base rate. If the BoE base rate goes up, so will the rate of interest you have to pay. If the Bank of England’s base rate goes down, your monthly payments will go down. In comparison, the interest rate on a standard variable mortgage is similarly tied to the Bank of England base rate, but can also be changed by the mortgage lender whenever they wish and for whatever reason. With a Tracker Mortgage, you are guaranteed that the rate will only track the BoE rate and will not be affected by any other factors.
Flexible mortgages
This type of mortgage is designed to accommodate your changing financial needs. They may allow you to overpay, underpay, or even take payment holidays. You may also be able to make lump sum payments without penalty. If you overpay, you may also be able to borrow again. However, to enable all this flexibility, the interest rates charged on flexible mortgages are only expected to be higher than most other repayment loans.
Limit mortgages
Limited rate mortgages, similar to standard variable rate mortgages, offer you a variable rate of interest. The difference is that your price will have a cap. This ensures that the price will not exceed a certain amount.
It sounds like a big deal but there is a downside. The bank will start the mortgage at a higher interest rate than the normal variable rate or fixed rate. This is to cover the bank in the event that future interest rates rise above the rate they set for you.
The caps also tend to be quite high, so it is unlikely that the BoE prime rate will rise above it over the life of the mortgage.
Since the bank is able to adjust the rate on this mortgage at any time up to the cap level, it is best to think about the maximum amount you may have to pay each month.
Mortgages
Offset mortgages are sometimes known as checking account mortgages. They link your bank account to your mortgage. If you have savings it will go towards the balance of the mortgage. For example, if you have £20,000 in savings and a £200,000 mortgage, you will have to pay interest on the balance of £180,000. You will not receive any interest on your £20,000 in savings but you will not have to pay interest on £20,000 of your mortgage.
Some offset mortgages are linked only to your checking account, while others are linked to your checking and savings accounts. Mortgages are available on fixed rate deals or a combination of variable rate offers as well.
