Mortgage Products Explained

When you apply for a mortgage there are different types of mortgage product available. Below we explain the differences to give you better understanding when selecting a product.

Fixed rate mortgages

This is a mortgage whereby the interest rate you are charged remains the same throughout the length of the deal, irrespective of what happens to the interest rates. They come through different term options most commonly over two years or five years fixed rate deals.

Advantages

  • Good option in helping you budget as it offers the peace of mind of knowing that your monthly payments will always remain the same throughout the fixed rate term.

Disadvantages

  • Fixed rate mortgages are usually slightly higher than variable rate mortgages
  • If interest rates fall, you will not benefit from this reduction

Things to look out for

  • There is a penalty charge if you decide to break mortgage deal whilst on the fixed rate term.
  • You should look around for a new mortgage deal a few months before the fixed rate term comes to an end. This is because once the fixed rate term ceases the rate reverts to the lenders standard variable rate which is usually higher.

 

Tracker mortgages

The interest rates on tracker mortgages are linked to the Bank of England base rate. Therefore if the Bank of England base rate changes your mortgage rate will change.

For example, if the Bank of England base rate was set at 0.25% and you had taken out a tracker mortgage that is set at 1.5% above the base rate, you would pay an interest rate of 1.75%. If the Bank of England where to raise their base rate to 0.5% then your mortgage rate will increase to 2%.

Like fixed rate mortgages, they come over differing term options, most commonly two years and five years tracker.

Advantages

  • If the Bank of England base rate falls, so will your interest rate which will mean a reduction in your mortgage payments.

Disadvantages

  • If the Bank of England base rate increases. So will your interest rate which will mean an increase in your mortgage payments.
  • You may have to pay an early penalty fee if you decide to switch your deal before your term finishes.

 

Offset mortgages

This is a type of product that lets you link your mortgage to your savings. The savings balance you have is used to reduce the amount of interest charged on the mortgage. Therefore, your savings will be “offset” against the value of your mortgage, and you will only pay interest on your mortgage balance minus your savings balance. Your savings do not repay any of your mortgage, they just sit alongside it and save you interest.

For example, If you have a mortgage of £100,000 mortgage and £10,000 in savings which can be offset against the mortgage, you will only pay interest on £90,000. This means you could pay off your mortgage more quickly.

Advantages

  • You will still have instant access to your savings
  • Can accelerate your mortgage repayment

Disadvantages

  • The interest rate charged on this type of mortgage is usually higher than other mortgage product options
  • If you were to offset your savings against the mortgage you will not earn interest on these funds the same way as if they were in a savings account.

 

Capped rate mortgages

This is when your rate moves in line with the lenders standard variable rate (SVR). However the cap will mean that the rate cannot rise above the limit set.

Advantages

  • Certainty – You will have the certainty of knowing that your rate will not rise above the threshold limit set. won’t rise above a certain level. However, you would need to bear in mind that you can afford the repayments if the rate reaches the peak limit set.
  • Your interest rate will fall if the lenders SVR comes down.

Disadvantages

  • The cap that is set is usually quite high tends to be set quite high
  • The interest rate is usually higher than other variable and fixed rates
  • Your lender is able to change the rate at any time up to the level of the cap

 

Discount mortgages

This is another form of variable mortgage like the tracker mortgage. However, it is very different as in the tracker mortgage is linked to the Bank of England base rate, whereas the discount mortgage is linked to the lenders standard variable rate (SVR). This is significantly different as the lender is able to change their SVR even when there has been no change to the Bank of England base rate.

They too are available in different term options, typically one to five years

Advantages

  • If the lender cuts its SVR, you will benefit from this as your monthly payments will reduce.

Disadvantages

  • It is not ideal when trying to budget as the lender is free to raise its SVR at any moment, which in turn means an increase to your monthly mortgage payments.