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Common Mortgage Types

A mortgage is a loan that is secured against the value of your home, and is generally a long-term financing solution for a large sum or money. When you are looking to buy a property you will almost certainly require a mortgage with which to fund the purchase, there is a plethora of options available to you in the mortgage field, and knowing what each type offers you is important – the following is intended to give you a clearer idea of what is available to you.

Fixed Rate Mortgages

As the name suggests, the rate of interest is fixed with this type of mortgage. The rate is decided upon when you arrange the mortgage, and is fixed for a set period of time which may be the life of the mortgage, or could be a lesser period after which it will change to a tracker style interest rate.

Fixed rate mortgages are ideal for those people who wish to be certain of their expenditure each month, as with a fixed rate of interest your monthly mortgage repayments will be at a set level.

Variable Rate / Tracker Mortgages

Variable rate, or tracker, mortgages have an interest rate that remains a set level above the Bank of England base rate. This means that if the base rate is increased then the interest rate of the mortgage will also rise by the same amount, conversely if the base rate falls then so to will the mortgage rates.

This type of mortgage is good in times when interest rates are falling, as the cost of the mortgage will be reduced and the borrower will save money, however there is always a risk that the rates will rise, and you need to be aware of this and sure that you will be able to meet any increases should they occur.

Capped Rate Mortgages

These are very similar to tracker mortgages in that they are affected by the Bank of England base rate, however they have a set upper limit which the interest cannot exceed. This removes the worry that you could end up with interest charges that you cannot afford, as you will know the absolute maximum that your repayments could be when arranging the mortgage.

With this form of mortgage you get the benefits of the variable rate mortgage in that your monthly repayments will fall if the base rate does, but are shielded to a certain degree from rate increases by having a cap on the amount that they can rise. This best of both worlds approach provides the benefits with reduced risks, however you will find that the rates will be slightly higher for the privilege.

Flexible Mortgages

Flexible mortgages are designed to offer the borrower a certain degree of freedom in terms of their repayments, giving them the option of underpaying, overpaying and even taking payment holidays.

The underpayment option can be very useful when money is tight, allowing the borrower to reduce the amount that they pay on their mortgage. There will be restrictions on the number of times this can be done, and there may be other conditions associated – it is worth noting that underpayment will effectively extend the mortgage, and with interest calculated daily, increase the overall cost.

Overpayment comes in when the borrower wishes to reduce their mortgage by increasing the amount that they pay, there are generally no restrictions on this, and it will reduce the cost of the mortgage to do so.