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Different Mortgage Schemes
Standard Variable Rate Mortgages
With a variable rate mortgage the interest rate you will pay is called the lender's standard variable rate of interest (SVR). The interest rate payable will vary according to interest rates, which means that if the Bank of England puts ban base rate then you will see an increase in the costs of your repayments.
You may gain if interest rates drop because your payments will follow suit but you should also be aware if rates go up so will your repayments.
Fixed Rate Mortgages
The advantage of a fixed rate mortgage you won't see any increase or decrease in your monthly repayments for the time the mortgage is fixed. The disadvantage of a fixed rate mortgage is that if interest rates drop below your fixed rate, you will be tied into your set higher rate until the end of the agreed period.
At the end of the term borrowers will typically be converted to the standard variable rate.
Discount Rate Mortgages
Many lenders offer discounted schemes giving a reduction off of their variable rate for a specified period of time (anything from 2 to 5 years). Be aware as this type of mortgage is variable your mortgage payments can go up as well as down.
The lenders Standard Variable Rate will apply when the discounted period ends.
Capped Rate Mortgage
Capped rate mortgages are a mixture of the fixed rate and discount rate mortgage. A maximum interest rate is set for a set period of time. Should the SVR drop below the set rate you will pay the lesser amount. Should the mortgage rate increase above the set rate your payments will not exceed the capped rate.
Some capped mortgages known as cap and collar mortgages, have a ceiling and a floor (maximum and minimum) between which the rate payable may move.
Cashback Mortgage
The interest rate will generally be at the current SVR. A cashback mortgage will give you at completion a lump sum (typically between 3 and 6% of the loan borrowed). However, they do come with restrictions. The cashback must be repaid should you repay in full the mortgage within a given time (redemption period).
Flexible Mortgages
Flexible mortgages were developed to assist with the changes that can occur in a homeowners financial circumstances, (e.g. career break, job loss). They are also known under different titles such as freedom or open plan mortgages.
Features these mortgages may offer include:
- Monthly overpayments (reducing the term and saving on interest)
- Reducing/stopping payments during times of financial hardship
- Lump sum payments
- Cheque books to allow withdrawals (subject to loan to property value)
Flexible mortgages can allow you to alter your repayments to suit your situation. If some months you would like to pay a little extra, you can. You can also (if you have built up a large enough reserve) pay less or take a payment holiday.
Most of these types of mortgages charge daily interest, which means that the calculations are daily any capital repayments are deducted immediately, additionally if you can pay more than the set repayment, you could reduce the term of your mortgage.
Current Account Mortgages
Current account mortgages combine a mortgage with a current account. Advantages are that when your interest is calculated on your mortgage, the funds you have in your current account are taken into consideration and taken off the loan interest calculation.
If you borrowed £120,000 and have £5,000 in your account you will only be charged interest on £115,000.
Offset mortgages
With offset mortgages all your accounts are in one place. Your funds in your savings and current account are taken into consideration when mortgage interest is calculated.
If you have a regular healthy amount of credit in other accounts this type of mortgage is worth considering.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.