Whether you’re buying your first home or re-mortgaging, looking for a better deal there are a range of options available to you.
The most common types of mortgage are fixed rate, tracker, discount and offset.
Fixed Rate Mortgages
A fixed rate mortgage has an interest rate that remains the same throughout the life of the deal. Most fixed rate mortgage deals are offered between 1 and 5 years with some companies offering a term as high as 10 years. This type of deal is a great for those who wish to budget their outgoings and so are especially popular with first time buyers however, the risk comes if interest rates drop as this type of mortgage won’t offer the benefits of reduced payments.
A tracker mortgage is linked to the Bank of England base rate and so if the base rate changes so does the mortgage interest rate. For example, if the Bank of England base rate is 0.5% and you took a deal with a rate of 3% above the base rate, the interest rate on the mortgage would be 3.5%. If the Bank of England was then to increase the base rate to 1% the mortgage interest rate would increase to 4%. This type of mortgage is great for those who want to benefit from a better interest rate as tracker mortgages generally offer a more favourable interest rate than fixed rate deals. Due to the unpredictability of the changes in the Bank of England base rate, anyone wishing opting for a tracker mortgage should ensure they can afford the repayments should the Bank of England base rate change.
Discounted mortgages are also a type of variable mortgage but instead of being linked to the Bank of England base rate these are linked to the lender’s Standard Variable Rate (SVR). The additional risk with this type of mortgage is that the lender can alter their SVR at any time without there needing to be any change in the Bank of England base rate. Again it is important to know that the monthly payments can still be met irrespective of any change in the SVR. The advantage however, is that the SVR can drop and therefore so would the monthly repayments.
A slightly less common type of mortgage is the offset mortgage. This type of mortgage works by linking the amount of savings you have to the amount of mortgage outstanding and so rather than earning interest on your savings, the amount of savings is offset against the mortgage and so you pay less interest on the debt. So, for example if there was an outstanding mortgage of £200,000 and savings of £50,000, interest would only be charged on £150,000 however, the monthly repayments will be calculated as if the debt was £200,000 and so the amount paid each month ends up being more than needed and so the mortgage will be cleared more quickly and save money that would otherwise have been paid in interest. An offset mortgage also comes with the option of a variable or fixed interest rate.
There is also a tax benefit to offset mortgages as you would ordinarily pay income tax on any interest you earn on savings
however, as you don’t accumulate any interest on the savings there is no tax to pay so these types of mortgage may be of particular interest to higher rate tax payers.
A main disadvantage of an offset mortgage however, is that the rates tend to be higher than standard mortgages and so unless you have substantial amounts of savings this type of mortgage may not be competitive in comparison.
Looking for more information?
Call the team on 01332 223888 or email us at firstname.lastname@example.org – Alternatively, please complete the mortgage enquiry form.
YOUR HOME MAY BE REPOSSESSED IF YOU DO
NOT KEEP UP REPAYMENTS ON A MORTGAGE.
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