If you decide to buy property, then chances are, you will need a mortgage. You may already have some idea of how mortgages work and how they can benefit you, but mortgages are not just about the rate of interest. The type of mortgage you choose will make a difference as well – and it can impact your life for many years to come. So, what should you know about the most common types of mortgages available? Let’s find out.
The two main kinds
There are basically two main kinds of mortgages, and these two are fixed rate and variable rate mortgages. The fixed rate mortgage is where the interest will remain the same for a few years, often between 2 and 5 years. The variable rate mortgage is where the interest can change depending on different factors.
- More on fixed rate mortgages
With fixed-rate mortgages, since the interest rate will remain the same, you have additional confidence and peace of mind because your monthly repayments will not change for a certain duration, and you have a better chance of managing your budget. If you want to leave the arrangement or deal at an earlier time, however, you may be charged additional fees. Also, you should make sure to look for another mortgage deal at least 3 months before the current deal ends; otherwise, you will be automatically moved to the standard variable rate of the lender, which is often higher.
- The kinds of variable rate mortgages
There are also different kinds of variable rate mortgages, such as the standard variable rate, discount mortgages, tracker mortgages, and more. The SVR or standard variable rate is the standard rate of interest charged by the lender to homebuyers, and the SVR will remain the same for the duration of your mortgage unless you go for another deal. A change in the rate of interest may happen if there is a fall or rise in the Bank of England’s base rate, as the specialists at mortgage-wise.co.uk attest.
A discount mortgage is a discount on the SVR of the lender, and it is only applicable for a certain period, normally 2 to 3 years. Bear in mind that there are different SVRs for different lenders, so it pays to do your research to find out the best discount mortgage for you.
A tracker mortgage moves in line with the base rate of the Bank of England plus a little more. If the base rate, for instance, rises by .5%, then your interest rate is slated to increase as well. Tracker mortgages typically last for about 2 to 5 years. The good news is that if the rate falls, then your payments will decrease as well.
Another type of variable rate mortgage is the capped rate mortgage, where your interest rate can be in line with the SVR of the lender, although with a cap, the rate will not rise more than a particular amount. With this, you have more certainty since the rate will not rise as there is a cap on it. The cap may be quite high, however, so you have to make sure that you could still afford the payments even if the rate increases to the cap level.