What different types of repayment mortgages are there?
Standard variable rate mortgages
The Standard Variable Rate or SVR is a type of mortgage where the interest rate can change, influenced by the Bank of England base rate. Each bank sets its own standard variable interest rate, which is generally a couple of percentage points higher than the Bank of England’s base rate. SVR is one of the most common types of mortgages available with many leading lenders offering at least one and sometimes offering several with different rates and terms to choose from.
You are more likely to stick with this type of mortgage after finishing a fixed-rate, tracker, or discount mortgage.
A lender can increase or decrease your SVR at any time, and as a borrower, you have no control over what happens to you.
An advantage of this type of mortgage is that you can generally make overpayments or switch to another mortgage agreement at any time without paying a penalty. Another benefit is that the interest rate will generally drop if you lower the Bank of England base rate. The downside is that the rate can increase at any time and this is worrying if you are on a tight budget. The lender is free to increase the rate at any time, even if the Bank of England base rate does not increase.
Fixed rate mortgages
A fixed rate mortgage means that the interest rate is fixed for the duration of the deal. Fixed-rate mortgages are suitable for those who want to budget and prefer to know exactly what their monthly expenses will be. You don’t have to worry about general increases in interest rates and you can be safe in the knowledge that your payments will not increase during the fixed rate period. An early repayment fee may apply if the mortgage is repaid during the fixed period.
In addition to standard variable rate and fixed rate mortgages, there are a few other types you may want to consider before choosing the one that is right for you. You could even combine some of the options.
Discount on variable mortgages
Basically, a discounted mortgage offers an introductory offer. This type of loan is cheaper than the Standard Variable Rate at the beginning of your mortgage. It allows you to take advantage of a discount for a specified period of time at the beginning of your mortgage, usually the first 2 or 3 years. When the established period ends, the interest rate will be higher than the Standard Variable Rate.
The introductory discount rate is variable, as is the rate that follows, so keep in mind that, like a standard variable rate mortgage, the amount you pay is likely to change based on the Bank’s base rate. England for the duration of the mortgage. Also note that the discount offered at the beginning can be very good, but you must take into account the general rate that is offered.
An early repayment fee may apply if the mortgage is repaid during the discount period.
With a follow-up mortgage, the interest rate is tied only to the Bank of England base rate. If the Bank of England base rate increases, so will the interest rate you must pay. If the Bank of England base rate falls, your monthly repayments will go down. By comparison, the interest rate on a standard variable rate mortgage is similarly pegged to the Bank of England base rate, but can also be changed by the mortgage lender at any time and for any reason. With a Tracker mortgage, you are assured that the rate will only follow the Bank of England rate and will not be influenced by any other factor.
This type of mortgage is designed to adapt to your changing financial needs. It can allow you to overpay, underpay, or even take a paying vacation. You can also make lump sum refunds without penalty. If you make overpayments, you may also be able to apply for a loan. However, to allow for all this flexibility, expect the interest rates charged on flexible mortgages to be higher than most other repayment mortgages.
Limited rate mortgages
Limited rate mortgages, similar to standard variable rate mortgages, offer you a variable interest rate. The difference is that your rate will be capped. This ensures that the rate will not exceed a certain amount.
It sounds like a great deal, but there is a downside. The bank will start the mortgage with an interest rate higher than the normal standard variable rate or the fixed rate. This is to cover the bank in the event that future interest rates rise above the rate they have set for you.
Also, caps tend to be quite high, so the Bank of England base rate is unlikely to exceed during the term of the mortgage.
Since the bank can adjust the rate on this mortgage at any time up to the limit level, it is best to think of the limit as the maximum amount you could have to pay each month.
Offset mortgages are sometimes known as checking account mortgages. They link your bank account to your mortgage. If you have savings it will go towards the balance of the mortgage. For example, if you have £ 20,000 in savings and a £ 200,000 mortgage, you will have to pay interest on the £ 180,000 balance. You will not receive any interest on your £ 20,000 savings, but you will not have to pay interest on your £ 20,000 mortgage.
Some offset mortgages link only to your checking account, while others link to both your checking and savings accounts. Offset mortgages are available in fixed rate offers or also in a variety of variable rate offers.