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Types of Mortgage
Fixed Rate mortgage
The interest rate remains the same throughout the period of the deal – typically one to five years, though it is possible to get ten year fixed rates. If you opt for a fixed-rate, you’ll have the security of knowing exactly how much your mortgage will cost you for a set period of time.
The interest rate on a tracker mortgage is linked to the Bank of England base rate. So, if the base rate changes, your mortgage rate will change.
If the base rate was 0.50%, and you took a tracker mortgage with a rate that is 2% above the base rate you'd pay an interest rate of 2.50%. If the Bank of England put the base rate up to 1%, your mortgage rate would increase to 3.00%. This would add about £25 a month to the repayments on a £100,000 mortgage.
As with fixed rate mortgages, trackers are available over different terms: most commonly two or five years. With these deals, you’ll be charged a penalty if you want to get out of the mortgage during the term.
You can also get lifetime, or term, trackers and these are often completely penalty free so they are very flexible and can be a great option if you don’t want to be tied into your mortgage.
Trackers aren’t the only type of variable mortgage. Discounts are another. However, unlike trackers the interest rate isn’t linked to the Bank of England base rate. Instead, it’s linked to the lender’s standard variable rate (SVR) and this is a significant difference because lenders can change their SVR even if there has been no change in the base rate.
Discount mortgages are available over different terms – typically one to five years – and as with trackers and fixed rate deals you will probably be charged a penalty if you want to get out of the deal during the term.
Lifetime Mortgages & Equity Release
Interest Only mortgage
With interest-only loans, you pay just the interest month by month and repay the capital at the end of the period with money you've saved elsewhere.
This is quite different from a repayment mortgage because at the end of the loan you'll have to find enough money to repay the whole debt. You can save up any way you want or use money from an inheritance but you must be confident of having the money to hand when the time comes to repay. If you don't, you might have to sell the house to pay off the mortgage.
You could be lucky and find that your home has increased so much in price that the extra value is enough to remortgage and pay off the debt.
There's still a risk that won't be able to repay the mortgage on time so, before granting an interest-only mortgage, lenders can insist you show them how you intend repaying the loan at the end.
The big advantage of interest only mortgages is that your monthly repayments are lower than with any other mortgage because you are paying only the interest due. If you find you're getting nervous about being able to repay the loan on an interest only basis, you may be able to switch to a repayment loan at a later date.
Offset mortgages are linked to a savings account and combine savings and mortgage together.
Each month, the lender looks at how much you owe on the mortgage and then deducts the amount you have in savings. You pay mortgage interest just on the difference between the two. For example, if you have a mortgage of £100,000 and savings of £5,000, your mortgage interest is calculated on £95,000 for that month.
This cuts the amount of interest you pay but the mortgage rate is likely to be more expensive than on other deals. You can still access your savings if you need to but the more you offset, the quicker you'll repay your mortgage.
When you use your savings to reduce your mortgage interest, you won't earn any interest on them but you won't pay tax either which is particularly helpful for higher rate taxpayers.