Types of mortgages

There are various choices of mortgage rates that you can choose from.  The different types are based on whether you would prefer a fixed or a varying rate and over what period - these vary from 2, 3, 5 year deals up to 25 years.  You also need to consider how quickly you want to repay your mortgage.

The different types of mortgage rates are:

Fixed-rate mortgages

This mortgage rate is the most common.  Typically, borrowers tend to secure fixed-rate mortgages so they know what their monthly repayments are.  Fixed-rate mortgages provide you with certainty and confidence when buying a property as you will know what your monthly repayments will be over a predetermined period.  Many lenders will also offer flexible choices within these fixed rates to allow people to reduce their mortgages more quickly over time.

If you wish to buy a property at your maximum limit or if you prefer the security of knowing your repayments will not change, then a fixed-rated deal is probably most suitable for you.  The downside of a fixed-rate mortgage is they are generally more expensive than the tracker or discounted alternatives. Two-year fixed rates are most popular with British homeowners, but increasing numbers of borrowers are changing to longer term fixed rates of five or ten years.  If you choose to do this, ensure your loan is portable and can be transferred with you should you decide to move home, but any extra borrowing will need to be with the same lender and will be subject to the lender’s criteria at that time.

Tracker mortgages

These deals work in a similar way to variable rate mortgages. The difference is the mortgage tracks the Bank of England base rate rather than the lender's standard variable rate (SVR).  Borrowers are guaranteed the full effect of any rate change, up or down.  These rates are often flexible and can be arranged without any early repayment charges and are sometimes available for the term of the whole mortgage.

Discounted mortgages

These mortgages are linked to the lender's standard variable rate (SVR) but tend to follow the SVR at a discount of between 1% and 2%. These rates move up and down in line with changes to interest rates and borrowers need to be confident that they can meet the increases should this occur.  It is important to note the lenders decide the SVR and they are not compelled to pass on any changes in the Bank of England interest rate to borrowers.  Most often lenders will pass on increases in rates but don’t always pass on full savings.

Standard variable rates

This is the default rate which falls into place when the main mortgage deal expires.  Borrowers who fail to check the value of their mortgage deal tend to end on standard variable rates. The repayments on these are often not competitive when compared with special offers in the market. The rate normally moves in line with the Bank of England's bank rate, although the lender is not obligated to pass on the changes in full.

How to repay your mortgage

Once you have decided which mortgage product is right for you, you need to choose the best way to repay the mortgage.

It’s important that you have a clear idea on how you will repay your mortgage, either on a repayment or interest only basis.  You also have the choice of combining these methods on a part repayment and part interest only basis, a method often used by people with alternative repayment methods which will not repay the full mortgage, for example, historic endowment policies.

Repayment

Repayment mortgages provide you with the most certain way of paying off your mortgage over an agreed number of years.

Your monthly payment covers the interest charged for the loan. It also repays part of the money borrowed. In the early years, the largest part of the monthly payment is interest. However, as the mortgage balance reduces, so does the interest portion. This means that towards the end of the mortgage, most of it is going towards paying off the money you’ve borrowed. The mortgage will be repaid at the end of the mortgage term providing you maintain the payments.

Interest only mortgage

There are several different variations of this type of loan but they all have one feature in common, namely the monthly payment consists only of the interest charged for the mortgage.

To repay the capital borrowed on an interest only mortgage, you will need to arrange an alternative repayment method. Typical examples of methods used to repay an interest only mortgage are:

• endowment policy
• pension policy
• individual savings account
• unit trusts
• bonus payments
• investment portfolios
• inheritance

You will however need to be certain that you can repay the mortgage at the end of the term you agree to and this method represents a much higher risk when compared with a repayment mortgage.