The 10 most common types of Mortgage
The 10 most common types of Mortgage
As you can understand, the process of applying for a Mortgage isn’t a quick one page form. A lender will want to make sure you are a good risk to lend to and that they are being sensible with the money they lend. Different lenders will have different rules, or criteria about what type loans they want to make and to who.
Standard Variable Rate Mortgage
Also known as “Variable”, “Variable Rate”, and “SVR”
With a Standard Variable Rate Mortgage, the rate of interest you pay the lender can change at any time during the term of the Mortgage. Usually the lender uses the Bank of England base rate as a guide as to when and how much they change their rate. You can usually switch to any of the other types of Mortgage, such as a fixed rate, quickly and simply at any time.
Fixed Rate Mortgage
The rate of interest you are charged is fixed for a set term, typically between two and five years, although it can be a year or even up to 15 in some cases. The advantage of a Fixed Rate Mortgage is that you have certainty about how much you are going to pay each month.
The down side is that if interest rates fall, you will not enjoy the benefit of the lower rate.
Capped Rate Mortgage
This is the same as a Variable Rate Mortgage, however, the lender has put a cap on the maximum amount of interest it will charge. For example, If the Variable rate is 3% and the lender has put a cap of 5% on the loan, then the lender can change the rate to any rate it wishes, but not above 5%.
A Tracker Mortgage is very similar to a Variable Rate Mortgage in that it will fluctuate, typically in line with the Bank of England base rate. However, with a Tracker Mortgage, the lender will set a specific margin between what the Bank of England base rate is and how much it will charge. To illustrate this, if the Bank of England base rate is 0.5% and the lender has a fixed margin of 2% above it, then the amount you will pay is 2.5%. If the Bank of England increases the base rate to 0.8% then, using the same 2% margin, you will pay 2.8%
A Discount Mortgage is the same as a Variable Rate Mortgage but with a discount applied for a specific period, typically between one and three years. So if your Variable rate is 3.5% with a 1% discount for two years, then you will pay 2.5%. Bear in mind it is also a variable rate so if that changes, so will your repayments.
This is an offer to persuade you to take a specific product. Different lenders will have different terms and conditions for offering a cashback, and these may vary between different products from the same provider. It is quite a simple idea, you take the Mortgage with the cashback offer and the lender will make a cash payment back to you, usually at the time of your first monthly repayment.
With an Offset Mortgage, you link your normal current account to your Mortgage account. The idea behind this is that the money sitting in your current account “offsets” some of the amount owed in your Mortgage account and therefore can reduce the amount of interest you are paying.
Flexible Mortgages include features such as the ability to take a payment holiday, vary your repayment amount, and even take money back from the Mortgage account that you have already paid. Each lender and each product will have its own rules on just what is and isn’t allowed.
Not really a specific product as such, but it is a term frequently used and as such worth including here. A Remortgage is simply where you already have a Mortgage and you choose to move it to a new product or provider. You may or may not use the opportunity to increase, or decrease your borrowing but very often a Remortgage is sought by those wishing to reduce the interest they are paying or to access another type of offer.
A Lifetime Mortgage is a specific type of Mortgage available to people over 55 who wish to take cash from the value of their property to use as they wish.
This is very often referred to as Equity Release.
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