Mortgage Types Retirement planning, investments and corporate planning. Fixed Rate Mortgages The monthly interest rate will stay the same for a set period of time, for example, between 2-5 years. At the end of the fixed rate period your rate will usually change to the Variable rate, or it is at this point where one would possibly re-mortgage
to secure a better rate.
Pro's
The rate is guaranteed to be exactly the same every month for the duration of the fixed rate term - even if other interest rates rise during this period. You can confidently plan your budget for the whole period, because you'll know in advance exactly
what your major outgoings will be. The market for fixed rate mortgages is very competitive, hence there are plenty of deals to choose from.
Con's
If the Bank of England interest rate, or indeed lenders standard variable rates fall during the set period, then the amount you pay during the fixed rate term may be higher than if you had chosen a mortgage type where the interest rate is allowed to rise
and fall.
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Variable Rate Mortgages The 'Variable' rate for the purposes of our Mortgage Guide, means either the lender's standard variable rate or those rates which track an external rate (often the Bank of England base rate). 'Variable' means the rate can go up and down in line with market
changes, and rates are often altered on the day those changes occur.
Pro's
The rate you pay may fall if mortgage rates in the market fall - this means your payments may go down and you would pay less for your mortgage. A variable rate without any special incentives may allow you to repay some or all of your loan without having
to pay early repayment charges, as there are often no "tie-in's" with these mortgages.
Con's
Your payments will increase if mortgage rates rise. It is therefore vitally important to ensure that if rate do increase significantly, that you could afford to make your mortgage payments and sustain the increase.
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Capped Rate Mortgages With a Capped Rate Mortgage your payments are linked to a Variable rate which means that payments may go up or down - however, the amount the rate can rise to is restricted to an upper limit (the 'cap') for a set period of time. Sometimes these mortgages
come will a 'collar'. This will stop the interest rate dropping below a specified level, e.g. a collar of 3% and a cap of 7% means your mortgage will remain within these rates until the end of the deal period At the end of the period you are usually
charged at the Variable rate.
Pro's
These mortgages provide certainty that the Variable rate charged to your mortgage will not rise above the cap. This means you are protected from significant rises in Variable rates. This will help you to budget. In addition, you will be able to enjoy
a lower rate if interest rates fall. These mortgages are especially attractive to buyers when it is thought that interest rates will rise.
Con's
The capped rate may not be as beneficial as a fixed rate mortgage if rates rise, as the upper limit of a capped rate is often higher than a fixed rate. However, they are useful in times of uncertainty especially if rates do fall.
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Discounted Rate Mortgages Mortgage payments are based on a discounted rate set at a certain level, often between 1-3% below the Variable rate for a set period of time. This means your payments may go up or down regularly. For example, a 3% discount for 2 years off a Variable rate
of 6% would mean a pay rate of 3% for 2 years. If the VR rises to 6.5% then you would pay 3.5% from that point until the VR changed again. Sometimes these discounts are stepped over a period of time, for example, a discount of 2% in year one followed
by a discount of 1% in year two. After the set period the Variable rate usually applies.
Pro's
Provides you with lower payments in the early years to help with the cost of moving or setting up in your new home. A discount that gradually reduces means you do not usually face a significant increase in payments when the discount period ends.
Con's
If interest rates rise whilst you are on a discount, your payments may increase and you will have no protection against this.
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Tracker Rate Mortgages Trackers are variable-mortgages, usually linked to the Bank of England's base rate (BBR) or can be the London/European or US inter-bank offered rate (LIBOR) - the rate at which banks borrow from each other. So, for example, if you are asked to pay 0.25
per cent above BBR for 1 year and BBR at the time is 4.75 per cent, this makes the pay rate 5.00 per cent. If BBR increases to 6 per cent then your tracker rate increases to 6.25 per cent.
Pro's
The main benefit of trackers over other types of mortgage is that they are much more transparent. They are based on an independent rate, so you're not at the mercy of the lender as to how much they reduce or increase your rate. For example, when interest
rates increase, lenders sometimes add on a little extra to their SVR than the Bank of England adds to the base rate (0.30 per cent instead of 0.25 per cent, for example) or similarly fail to pass on the full percentage of a drop.
Con's
Unlike fixed-rate and capped mortgages, trackers don't offer any protection from rate increases and you won't have the security of knowing exactly what your repayments will be. A lot of tracker mortgages have higher arrangement fees.
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Cash Back Mortgages With a cash back mortgage you receive a single lump sum of cash back at the time you take out your mortgage. For example, on a ?100,000 mortgage with a 3% cash back, you will receive ?3,000. Some cash back mortgages offer a set amount of cash back irrespective
of the loan size. Cash backs are available on different types of rate but are more common with variable rate mortgages.
Pro's
Using a cash back mortgage can be useful to provide a source of money when you need it the most. For example, a first time buyer could use this for furniture or decorating the property, or it may help with legal fee's and the cost of moving.
Con's
Because of the lump sum you receive at the start of your mortgage, your rate may not be as attractive as some other mortgage types. The cash back you receive is given on completion so cannot be used as a deposit.
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Offset Mortgages Offset mortgages allow you to link your mortgage to your savings or current account, thus offsetting your mortgage against another pot of cash. The advantage of this is that the amount of interest you are charged is reduced, which theoretically allows
you to cut your mortgage term by several years.
Pro's
Despite higher interest rates, offset deals can be a useful mortgage for lenders with savings as in return for interest on their savings they will in fact be saving interest on their mortgage. Offset mortgages are very sophisticated products and there
are many variations to suit differing needs. Independent advice is essential with an offset mortgage.
Con's
The main drawback is that lenders charge more than other mortgages, so you need to make sure that you can make the most of the features on offer.
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Flexible Mortgages A flexible mortgage is a mortgage that allows borrowers to vary their monthly repayments in line with changing financial circumstances. Many people select flexible mortgages exactly because they like the idea of choice - whether they end up using the
features or not. We take you through the features many of these flexible mortgages offer.
Flexible features
Overpayments allow you to pay more than your agreed repayment, either regularly each month or now and again with a lump sum. If you choose to overpay, your monthly repayments will never reduce, but the term of your mortgage decreases instead.
Under-payments allow you to reduce your monthly repayments for a set period. This can be very helpful during periods of difficultly and could perhaps stop many borrowers going into arrears. Under-payments are only usually allowed to the value of overpayments
that have already been built up.
A payment holiday is a break from paying your mortgage altogether for an agreed period. This facility can be a help if you need to take a maternity/paternity leave, have a cash flow problem or a period of large expenditure, perhaps your own or a son/daughter's
wedding.
Borrow Back This feature allows you to make a lump-sum withdrawal from your mortgage account. The money comes either from your over-payment reserve (borrow-back) or from unused borrowing capacity (draw down). The latter is when the amount you originally
borrowed was less than the amount you were approved to borrow.
Flexible Payment Options The flexible payment facility allows you to pay on a fortnightly or even weekly basis instead of monthly.
Interest Calculated Daily/Monthly Flexible mortgages can offer interest calculated on a daily or monthly basis. The benefit of daily interest is that the adjustments of any overpayments are made overnight. This in turn reduces the amount of interest paid
over the mortgage terms.
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Current Account Mortgages With a Current Account Mortgage the mortgage is combined in the same account as your current account, in which your salary is paid, and often savings and sometimes also loans or credit cards. The interest gained on the flow of cash through the current
account is offset against the mortgage, which reduces the term of the mortgage. Current Account Mortgages are very similar in nature to Offset Mortgages, and professional advice should be sought before obtaining one as these sophisticated mortgages
are becoming increasingly complex, and are not right for everyone.
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