Types of mortgages
Before you choose the right mortgage, you need to decide what type of deal best suits you and your needs. Our advisers will help you with the choice, but here’s a quick run through of the main types of mortgage deal.
Fixed rates
The main decision to think about is whether you want a mortgage rate that's fixed or one that can move up and down.
A fixed rate mortgage simply means that your interest rate is fixed for a period of time - throughout that period your rate,
and most importantly your monthly payments, won't change. This means that a fixed rate is very useful when it comes to budgeting as you'll know exactly how much you'll need to pay each month.
If you're concerned about how you might afford rising mortgage payments, or if you just like to know what your outgoings will be each month, then a fixed rate is a good bet.
The downside with them is that they are typically more expensive than variable rates and if interest rates drop, your rate and payments will stay the same.
Tracker
Variable mortgage deals come in different guises, but generally speaking, the rate you pay will be linked to either your lender's Standard Variable Rate
(see below) or the Bank of England Bank Rate (often known as the Base Rate).
When the Bank of England Bank Rate changes, so will your mortgage rate and your monthly payments.
The good news is that if rates fall, your mortgage will get cheaper, however if rates rise, you'll find yourself paying more each month.
This means that a variable rate is riskier than a fixed rate and you won't know what will happen to rates in the future. Therefore it's essential that you're comfortable with the prospect of rising payments.
If you're not on a tight budget and you're willing to take the risk in return for a good deal, then a tracker rate is a good bet.
Discount
A discounted variable rate works in much the same way as a tracker rate, but instead of the Bank of England rate, the interest
rate you pay on your mortgage is linked to your lender's Standard Variable Rate (SVR).
The major difference between the two is that whilst the Bank Rate is set each month by the Bank of England, your lender sets its own SVR and can change it at its discretion. This could work for or against you
depending on how your lender changes its SVR in response to rate changes by the Bank of England.
Standard variable rate
Every mortgage lender will typically have a Standard Variable Rate (SVR) as well as its range of mortgage deals. It may offer deals linked to this rate (often with a discount for a period of time) and many fixed
or variable deals will revert to the SVR once the initial deal period is over.
Depending on the rates available, many borrowers will choose to remortgage to a new deal once their current one ends and they move on to their lender's SVR.
Offset
An offset mortgage allows you to use money you have in savings to reduce your mortgage balance and the interest that you pay on that balance. For example,
if you owe £100,000 on your mortgage and have £20,000 in savings, you could effectively reduce your mortgage balance to £80,000 by offsetting.
The benefit is that by paying less interest, you can reduce your monthly mortgage payments or pay your mortgage off quicker. You also keep instant access to your savings.
On the downside, offsets tend to be more expensive than standard mortgage deals so you need to be able to offset a decent amount of savings to reap the benefits.
Capped
A capped rate is a variable rate mortgage that cannot go above a certain level or cap. For example, you may have a rate with a current interest rate of 4% that is capped at 5% -
your interest rate could rise by 1% but it would then go no higher than 5%. If rates dropped however, you rate could also fall.
Capped rates are sometimes described as 'best of both worlds' deals, offering benefits of both fixed and variable deals. However, they also tend to be more expensive
so you may be paying more for the privilege.
Cashback
A cashback deal will give you a cash lump sum once your mortgage completes - usually a percentage of the amount you're borrowing. Expect to pay a higher rate of interest in return for the cashback and be sure to check the terms of the deal - unless you specifically need a cash lump sum on completion, you will probably be better off with a standard deal that doesn't offer cashback.