Fixed Rate Mortgage
A fixed rate mortgage allows you to repay interest at a fixed rate, irrespective of what effect the Bank of England's base rate? This means your monthly repayments will remain the same every month for a time period agreed between you and your lender, (this can be anywhere between 1 and 25 years). At the end of this chosen period your mortgage will be transferred to the Lenders standard variable rate mortgage.
Variable Rate Mortgage
With the standard variable rate (SVR) your mortgage lender will set the interest rate payable by you. The lender bases this rate on the Bank of England's base rate, and so when the Bank of England base rate changes the standard variable rate may follow soon after. The standard variable rate is usually between 2 and 3 percent higher than the Bank of England base rate, but varies from lender to lender. The advantage of this is that when the Bank of England's base rate is low your monthly mortgage interest repayments will be low. But when the base rate is high you will have to pay a larger monthly repayment.
Tracker Mortgage
This is a variable rate mortgage that tracks either above or below the Bank of England base rate. It is often advertised, for example (BBR +0.75%), which means that it will follow the Bank base rate by the amount shown, in this case 0.75% higher, for the initial period chosen at application. A tracker product will fluctuate in line with the Bank of England base rate, whenever it moves.
Capped Mortgage
A capped interest rate mortgage fluctuates in a similar way as a standard variable rate mortgage, or a base rate tracker, but cannot rise above a percentage agreed at application stage. This agreed percentage is the "cap". This means you will enjoy the low interest rates but your monthly repayments will be limited to not rise too high if the Bank of England's base rate rises.
Discount Mortgage
The discount mortgage rate is a variation of the standard variable rate. It provides a discount from the lenders SVR for a chosen period of time agreed between the borrower and the lender. The interest rate will still fluctuate, meaning your monthly repayments can differ slightly from month to month, but the agreed discount remains constant, for the chosen period.
Offset Mortgage
An offset mortgage offsets the amount in your savings and current accounts from the interest on your mortgage. This means that on one side you have a debt, (the mortgage), and on the other side a credit, (savings and current accounts). By sacrificing the interest normally earned in a savings account, you are able to use this money to overpay the mortgage debt. This will give you the opportunity to pay off your mortgage quicker and cheaper. Those who have large amounts of savings, or indeed those who receive bonus payments often find offset mortgages very useful, as well as those with variable incomes, such as the self employed.
When you apply for a mortgage the mortgage lender charges an interest rate for the lending service. So they provide you with the finances to buy a home and in return you pay them an interest rate.
Interest Only
With an interest only mortgage you pay you lender just the interest rate back, not the actual capital they lent you. It is up to you, the borrower, to put in place a method or vehicle to cover the capital element. In order to raise the capital you will need to invest elsewhere, and will need to accumulate enough to repay in full the capital borrowed. This investment fund usually comes in one of three forms:
The advantage of this type of mortgage is that your investment could potentially become larger than your mortgage meaning you could both pay your mortgage off early, and in some cases receive a lump sum at the end of the mortgage term. The down side is that if the chosen investment does not perform as will as expected, you could be left with an unexpected shortfall.
Capital and Interest
With a capital and Interest, you pay the lender the agreed interest rate determined at application, (known as the interest amount), plus an additional figure, (known as the capital). The capital element is calculated in such a way, that as long as you make each and every payment on time, every time, the mortgage debt will be repaid in full at the chosen term end. The advantage of this type of mortgage is that with each payment you make you are lowering your debt, and you are guaranteed to pay of the mortgage. It will be a little more expensive than taking the Interest only option, but it it the most popular repayment method.
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