Types of mortgage explained

Different mortgage types can seem confusing, so here's a guide to the differences, limitations and features of fixed-rate mortgages, tracker mortgages, discount mortgages and others. Let's start at the beginning...

What is a mortgage?

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 you find the right mortgage for you. 

When you have a mortgage application accepted and you start paying it back each month, you will pay an initial interest rate for a set period of time which you will agree in your deal, after which a new rate will kick in.

With a repayment mortgage you gradually pay off all the money owed on your house, as well as the accrued interest in a single payment each month until all the capital (the sum owed on your house) has been repaid. Repayment mortgages are sometimes called capital and interest mortgages. 

At the start of your mortgage term, when the debt is at its largest, the monthly payment will comprise more interest and less of the debt itself. As you get further into the term, you pay a larger proportion of the debt while the proportion of your payment made up of interest gets less. You will pay off the whole debt with this type of mortgage by the end of your agreed mortgage term.

A fixed-rate mortgage is where you pay the same rate of interest for the entire period of your fixed-term deal.

• 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 can be between 1 and 10 years. This is unlike a variable rate mortgage which can go up and down.
• They offer a fixed rate of interest normally lower than the Standard Variable Rate (the lender's own basic interest rate) and are currently some of the cheapest ever offered.
• You are tied in even if interest rates fall – and would possibly have to pay a fee to leave the agreement.
• When the fixed period ends, you move onto the lender’s Standard Variable Rate (SVR - see below), or you can remortgage.

A Standard Variable Rate (SVR) is the interest rate set by the lender itself and is usually higher than most mortgage deals available. These don't all track the Bank of England’s base lending rate and can move up or down whenever your lender decides.

There aren't SVR mortgages as such, it is what a mortgage out of a particular deal is called. Standard Variable Rates are what you are transferred to when a fixed-term deal ends, so it is worth shopping around if you find that you’re on the SVR mortgage rate. Lenders can raise or lower their SVR at any time – even when the Bank of England rate remains unchanged.

Variable rate mortgages include tracker mortgages and discount mortgages.

A tracker mortgage is where your interest rate follows the Bank of England’s base lending rate with a fixed amount added on top.

• When the tracker mortgage rate is low, you could take the opportunity to overpay each month.
• Your repayments aren’t dictated by your lender’s own rate – just the Bank of England.
• You won’t know for sure how your payments will change through the set period of the deal which means that you could pay a different amount each month. This could make consistent budgeting difficult. 
• Unless it is a “lifetime tracker”, when the fixed period ends, you move onto the Standard Variable Rate, or can remortgage.

A discount mortgage is when you pay the lender’s Standard Variable Rate, with a fixed discount each month for an agreed period of time.

• Discount mortgages can be capped (so they don’t go too high) or collared (where the rate can’t fall below a set figure).
• Your rate will always be below the SVR for the term of the agreement, but the lender can change the SVR at any time.
• There could be a leap in payments at the end of the fixed term when you are transferred to the SVR.

What is an interest-only mortgage?

An interest-only mortgage is where you only pay off the interest on your debt each month – but you’ll still have the cost of the house capital to find at the end of the agreement.

What is an offset mortgage?

An offset mortgage is when you could potentially use your savings to reduce the amount of interest that you pay on your mortgage loan. You have to have a savings or current account with the lender that's offering you an offset mortgage as they are both linked together. For example if you had £100,000 mortgage and £10,000 in savings, your offset mortgage that you would pay interest on would be £90,000. 

What is a cashback mortgage?

A cashback mortgage is where your mortgage lender pays a lump sum back to you which is usually between £500 and £1,000. These types of mortgages are usually to entice you into taking that particular deal but the deals may not come with other benefits such as no product fee. 

If you are looking for a mortgage, why not get in touch with Nottingham Mortgage Services and see what they can do? NMS' expert mortgage advisers will search over 60 lenders and thousands of deals to find the right one for you and your circumstances.