Mortgage Types and Jargon Busting
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What is a fixed-rate mortgage?
A fixed-rate mortgage is the most popular type of mortgage overall. The fact that it is fixed allows you to know exactly where you stand with your mortgage payments for a fixed duration.
Typically mortgages have an initial fixed-rate period of between two and five years. Some mortgages even offer a fixed-rate term of up to 10 years.
With a fixed-rate mortgage, your monthly payments will not change, regardless of what happens to the Bank of England base rates. This can therefore offer people considerable peace of mind.
Generally, the longer your fixed-rate is, the more expensive the product will be. So, for example, for a two year fixed-rate you will pay a much lower interest rate than you would for a five year period. In recent years, however, the price difference between fixed-rate durations has narrowed.
What is a variable rate mortgage and is it the same as an SVR?
Once your fixed-rate period ends,you will be put onto your lender’s SVR (standard variable rate).The standard variable rate is also what the lender charges somebody who isn’t on a specific product.
The SVR tends to be quite high, which means that repayments are higher and can rise alongside any interest rate rises. Your payments also go down when interest rates fall, however.
It’s not recommended that you stay on an SVR indefinitely, as you’ll often find better mortgage deals available through remortgaging, especially early on in your mortgage term.
What is a tracker rate mortgage?
This is another type of variable rate variable mortgage. The difference being that, rather than the lender’s SVR, your mortgage interest rates are set by the Bank of England base rate.
As the Bank of England base rate goes up, your mortgage interest rate will go up. It can be very beneficial, however, for those taking out a mortgage when the Bank of England base rates are set to go down.
What is a discounted mortgage?
Discount rate mortgages are where you receive a discount on the lender’s standard variable rate. For example; if a bank has a standard variable rate of 4.9%, a discounted rate might be, 2% below their standard variable rate.
This discounted rate is usually set for a certain period of time, much like a fixed-rate. It differs from a fixed-rate, however, in that it can still fluctuate based on variance of the lender’s SVR. So there’s not quite so much certainty around your monthly payments as there would be on a fixed-rate mortgage.
What is an offset mortgage?
An offset mortgage is a bit more complex and a little less common than other types of mortgage. This type of mortgage is aimed predominantly at those with a large amount of savings.
The way an offset mortgage works is you deposit a large amount of savings into an account with your mortgage lender. The lender will then allow you to offset these savings against the interest that you pay on your mortgage.
For example, if you have a mortgage of £500,000 and you have £250,000 of savings in your savings account with that lender, you would only pay interest on the remaining £250,000, halving your payable interest.
You do have the flexibility to withdraw some or all of the money, if and when you need to. This just means that a smaller amount of your interest is offset, in line with the remaining savings.
What is a capital repayment mortgage?
With a capital repayment mortgage, you pay off the full loan amount (capital plus interest) and will own your property by the end of the mortgage term.
Throughout the duration of the mortgage, you will see a constant decline in the amount owed, as you make more monthly payments.
What is an interest only mortgage?
An interest only mortgage is where you only pay the interest on the loan for the whole mortgage term. With this type of mortgage, you need to have a credible way of clearing the loan at the end of that term.
Endowment policies were popular many years ago and other options to pay off the loan might be bonds or unit trusts. Essentially, you will need some sort of investment in place to pay off the principal amount borrowed.
Flexible mortgage is quite a broad term as there are a wide range of flexible mortgages and these can vary between providers. One example of a flexible mortgage would be one which allows you to change the type before the term ends and without the need to remortgage.
For example, you may start off on a tracker mortgage and when interest rates start to rise, you can change it to a fixed-rate mortgage, but remain on the same mortgage with the same provider.
With a cashback mortgage, the lender pays you a certain amount of cashback, usually between £250 and £1000. This can be used towards your legal fees, moving costs or in some cases, it may be used as an incentive to remortgage with a new provider.
Overpayments and Payment Breaks
Most lenders will allow for overpayments of up to 10% of the amount you owe. Some will even allow underpayments or payment holidays, but this is usually only available to those who have already made overpayments.
For example, if your monthly repayments are £500 and you’ve been paying £700 for two years. Should you then have a change of circumstances, such as a job loss, your mortgage provider would be much more receptive to a reduction in repayments or a short payment holiday, so long as your previous overpayments cover the requested period.
Porting a mortgage
Porting is something that many, but not all lenders provide.When taking out your mortgage, if you think there’s any possibility that you will want to move in the next five or ten years, it’s a good idea to ensure that your mortgage is portable.
If your mortgage is portable, you will be able to take it to a different property with you, without changing lenders or mortgage terms.
Do mortgage brokers charge like solicitors?
Better Financial Services always give you a free initial consultation. Beyond that, the fees are very flexible and you don’t actually pay a fee until you’ve signed a client agreement. Any conversations prior to signing the client agreement are completely free of charge.
If you’re planning to take out a mortgage, even if it’s a year or two into the future, they will be happy to answer your questions. Perhaps you’re wondering how much you can borrow, maybe you’ve got adverse credit and would like to know if you have options, there is no charge involved in calling for that initial advice.
You can contact better financial services by email, phone or through the contact forms on their website.