Comparing Mortgage Types
Choosing a mortgage is not just about chasing the lowest rate you can find. With so many different
types of mortgage available it is important to find one that matches your current financial position.
It is therefore important to understand the various different mortgage types available on the uk mortgage market.
Tracker Mortgages
Tracker mortgages shadow the Bank of England base rate for a pre defined length of time.
Example:
for example it could ‘track’ the base rate plus 0.02% for 4 years.
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Tracker mortgages often suit those looking for the cheapest mortgage on the market,
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Your monthly mortgage payments can rise dramatically as the mortgage ‘tracks’ the Bank of England base rate.
Summary
Often the cheapest mortgage product available but carries the risks of large swings in your monthly mortgage payments
Discount mortgages
Discount mortgages offer a %age discount from the mortgage lender’s standard variable rate (SVR) for a fixed length of time.
Example:
The mortgage lender offers a discount of 1.9% below its Standard Variable Rate.
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Discount mortgages are often one of the cheapest mortgages available, Like tracker mortgages.
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but make sure you can afford any payment increases.
Summary
Discount mortgages are good for those needing one of the cheapest mortgages on the market, but as with the tracker mortgage, be careful as your monthly mortgage commitment can soar.
Fixed rate mortgages
Fixed rate mortgages are one of the simplest mortgages to understand; You agree to pay the same interest rate for a fixed amount of time. Therefore you know exactly what you are paying each month.
Example:
The mortgage offers a rate of 3.25% for 5 years; for the next 5 years you will pay the same monthly figure.
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If the Bank of England base rate increases, your payments stay the same
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As the Bank of England base rate falls, your mortgage stays static. They generally carry a slightly higher Interest Rate.
Summary
You pay a marginally higher interest rate, but you can be confident your mortgage commitments won’t
change and it allows people to budget. Fixed rate mortgages are popular with First Time Buyers as it makes budgeting easier.
Capped mortgages
Capped mortgages guarantee that your monthly payments cannot go above a certain amount, but if interest
rates fall significantly then your mortgage payments can drop.
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If the base rate falls you don’t loose out.
Guaranteed your payments wont exceed a fixed figure
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you will pay a higher interest rate than fixed
Summary
Capped mortgages are a mix between fixed a tracker mortgages; you can’t exceed a certain amount but you
have the potential to pay less if the base rate falls. This may make them sound like the ideal product for anyone but remember, you will pay a higher rate for the privilege of being able to track the base rate down.
Flexible mortgages
Flexible mortgages are, as the name suggests a more flexible version of the traditional mortgage.
Flexible mortgages allow you to do things that would normally not be possible with a traditional mortgage.
Common Features include allowing the home owner to make overpayments or take payment holidays. These
mortgages often suit self employed or ‘bonus income’ individuals.
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Flexible mortgages are there to be flexible to your financial needs, as such you may find some great features on offer.
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You will pay a higher interest rate for the privilege of this ‘flexibility’.
Summary:
They offer flexibility above and beyond that available with normal mortgage products however beware the
increased rates. Also recently many traditional mortgages have begun to offer flexible features such
as the ability to make overpayments, but do not charge a higher rate.
Only go for a flexible mortgage if you need a feature that you can’t find with a traditional mortgage.
Cashback mortgages
Cashback mortgages are much as they sound, the mortgage lender offers you cashback; this is usually a percentage of the amount borrowed.
Example:
You take out a £100,000 mortgage with an offered 3.5% cashback. At the end of the agreed period you
will receive £3,500 back from the cashback mortgage lender.
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It may tie up nicely with other financial commitments you have such as a balloon payment on a car finance agreement.
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You are tied to their mortgage lender for a set period of time. Usually carry a higher interest rate
Summary
Attractive cash sum, but watch out for higher interest rates and early repayment charges. Often only offers benefit to people with pre existing financial commitments such as a balloon finance payment on another finance agreement you hold.
Offset mortgages
Offset mortgages allow your savings to help pay off your mortgage, and we don’t mean by early repayment! Offset mortgages ‘offset’ the interest earned in savings against the interest payable on the equivalent lent sum, if that makes understanding offset mortgages sound like understanding Newtonian physics, don’t worry
Example
If your mortgage is £100,000 and you have £25,000 in your savings account, you only pay interest on the difference, in this example £75,000.
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Modern Product. Reduce your mortgage term by up to 8 years and 8 months over a traditional mortgage or reduce your monthly payments. Tax efficient for higher rate earners.
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No Saving no benefits. Generally a higher Interest Rate. Usually have higher interest rates than more traditional mortgages
Summary
If you have savings of 10% of your mortgage amount or more then its well worth considering, but as this
product requires the accurate balancing of parentages and tax rates its imperative you seek advice from a mortgage advisor first.