Mortgage Schemes
WHAT ARE THE DIFFERENT TYPES OF MORTGAGES?
Mortgage Schemes
There are many different types of mortgage to suit individual requirements. You should discuss your requirements with your advisor to determine which is the most suitable for you.
Variable Rate
As the name suggests, the interest rate can rise or fall, your
monthly payments follow the standard variable rate of the
lender. Whilst you benefit if rates go down, you also pay
more if rates go up. You cannot accurately budget for your
mortgage repayments. You will find that this product will
have no early repayment charge and normally no arrangement
fee.
Discounted Rate
The lender offers a true initial discount, for example a reduction
of 0.5% on their normal variable rate for a given period, commonly
two years. Whilst you benefit if rates go down, you also pay
more if rates go up. At the end of the discount period, the
rate reverts to the lender's variable rate applicable at that
time. You may have to pay an arrangement fee and there may
be an early repayment charge during the discount period.
Tracker / Tracker Discount
The benefit period can be from 6 months to term of the mortgage.
The Interest rate you pay has no reflection to the lenders
standard variable rate, instead is linked to the Bank of England
Base rate ensuring your payments reflect the underlying interest
rate. The rate payable may be "plus" or "minus" a
set percentage. i.e. BoE plus .5% for a given time. At the
end of the tracking period, the rate reverts to the lender's
variable rate applicable at that time. You may have to pay
an arrangement fee and there may be an early repayment charge
during the tracker period.
Fixed Rate
Terms vary from 1 - 25 years. This type of mortgage guarantees
that your interest rate will not change during the fixed
rate period. Generally the interest rate will be higher for
longer term fixed rates. Fixed rate mortgages tend to have
an arrangement fee, you can expect to pay an early repayment
charge if you redeem the mortgage before the end of the fixed
term. Once the fixed rate comes to an end you will revert
to the lender's standard variable rate which could be higher
or lower than the fixed rate you had depending on the economic
climate at the time.
Capped Rate
Most capped rates tend to have a benefit period of 5 years but
other terms are available. During this period the interest
rate cannot exceed the 'capped rate' but if interest rates
fall then you could benefit from a lower rate. Capped rate
mortgages also tend to have an arrangement fee as well as an
early repayment charge. Capped rates are usually set higher
than fixed rates so unless you believe rates are set to fall
significantly you may be better choosing a fixed rate. It is
not uncommon for capped rates to have “collars” that
put a minimum interest rate for the benefit period. At the
end of the benefit period the mortgage will revert to the lenders
standard variable rate.
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