Different mortgage types can seem confusing, so here's a guide to get you started on the differences, limitations and features of some of the more common types – such as fixed-rate mortgages, tracker mortgages and discount mortgages.
A mortgage is a loan to help you buy a property. Whether you’re a first time buyer, remortgaging, moving home or looking for a buy-to-let mortgage, Nottingham Mortgage Services can help find the right mortgage for you.
With a repayment mortgage you gradually pay off all the money owed on your house, as well as the accrued interest by making monthly payments. Repayment mortgages are sometimes called ‘capital and interest’ mortgages.
At the start of your mortgage term, when the outstanding loan is at its largest, the monthly payment will comprise more interest and less of the loan itself. As you get further into the term, you pay a larger loan amount whilst the proportion of your payment made up of interest gets less. You will pay off the whole loan with this type of mortgage by the end of your agreed term providing you have kept up to date with all payments.
An interest-only mortgage is where you only pay the interest on your loan each month – but you’ll still have the full balance of the mortgage on the property to repay at the end of the agreement. As part of your application, lenders will also usually request details of your repayment or exit strategy so that they know how you will repay the outstanding loan at the end of the term.
A fixed-rate mortgage is where you pay the same rate of interest for an agreed period, after which a new rate will kick in.
A Standard Variable Rate (SVR) is a lender’s default interest rate and is usually higher than most mortgage deals available. There aren't SVR mortgages as such; Standard Variable Rates are often what you are transferred onto when a fixed-term deal ends, although you may be moved onto a tracked or discounted rate. So it may be worth shopping around if you find that you’re on an SVR.
- With a fixed-rate mortgage you know in advance exactly what you’ll be paying back each month for a set period of time (your deal), which is usually between two and five years but can sometimes be up to ten or even fifteen years. This is unlike a variable rate mortgage which may see increases or decreases to the monthly payment, as it tracks a rate such as the Bank of England base rate or your lender's standard variable rate
- A fixed rate of interest can be lower than the Standard Variable Rate (the lender's own basic interest rate) and at the current time, fixed rate mortgages are at almost historical lowest rates
- You are tied in even if interest rates fall – and would probably have to pay a fee to leave the agreement, this is usually known as an Early Repayment Charge.
- When the fixed period ends, you move onto the reversion rate (the rate you move onto once a deal is finished)
- There will likely be an increase in payments at the end of the fixed term when you are transferred to the reversion rate but this isn't always the case. The other option is to move to a new deal with either the same or a different lender.
A tracker mortgage is where your interest rate follows or tracks an independently set interest rate, such as the Bank of England's base lending rate. This will be detailed in your mortgage agreement, but if you’re not sure, your mortgage provider will be able to let you know which rate your mortgage is tracking.
A tracker mortgage will usually last for a defined period, such as 2 or 3 years, but the term will vary from product to product.
At the end of your tracker mortgage deal, unless it is a 'lifetime tracker', when the tracker period ends you’ll move onto the lender’s reversion rate which could be its Standard Variable Rate or an independently set interest rate, such as the Bank of England's base lending rate.
With a tracker rate mortgage, your payments will increase or decrease in line with changes to the rate you are tracking. With a fixed rate, your payments will remain fixed for the duration of the fixed rate period.
Things to note about tracker mortgages
- When the tracker mortgage rate is low, you could take the opportunity to overpay each month subject to mortgage conditions
- Your repayments aren’t dictated just by your lender’s own rate, they are dictated by the one they are tracking
- Tracker mortgages can be capped (so they don’t go too high) or collared (where the rate can’t fall below a set figure).
A discount mortgage is where your interest rate is a fixed amount less than another rate defined by your lender (which could be the Bank of England base rate or the lenders SVR).
Discount mortgages last for an agreed amount of time, can be capped (so they don’t go too high) or collared (where the rate can’t fall below a set figure). When it ends you may go onto an SVR mortgage before you choose a new deal. Similarly to tracker and fixed mortgages, there could be an increase in payments at the end of the fixed term when you are transferred to the reversion rate.
A cashback mortgage is where your mortgage lender pays a lump sum back to you once your mortgage application and house purchase has completed.
Cashback can vary from lender to lender and time to time. Common cashback amounts could be a percentage of the loan amount borrowed or a fixed amount such as £500 or £1,000.
Some lenders will offer cashback for remortgage deals, a Nottingham Mortgage Services adviser can look at all products available to you.
An offset mortgage is when you have a savings or current account linked to your mortgage. Your savings balance is considered as if you’ve used this as part of your deposit without actually having to do so. You can still spend and top-up your savings but your interest payments on your mortgage will change in line with your savings balance.
A simplified explanation of how this works is, if you had a £100,000 mortgage and £10,000 in savings you would pay interest on £90,000 – you would still need to pay off the entire £100,000 loan.
Yes, you can overpay on an offset mortgage depending on whether your mortgage lender will allow you. Bear in mind that there may be fees for overpaying over a certain threshold.
If you are looking for a mortgage, why not get in touch with Nottingham Mortgage Services and see what they can do? Their expert mortgage brokers will search over 60 lenders and thousands of deals to find the right one for you and your circumstances. Get in touch online or call the team of brokers on 0344 481 0013 for expert mortgage advice.
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