Mortgage Types & Rates

It's that time of year when people start to become restless and consider their options regarding moving home. As the seasons turn, more sellers and buyers appear on the market, looking to upgrade their living space.

Most of these will need a mortgage to finance the deal, but have little clue about which type of interest rate to choose or method of repayment to opt for. Don't worry; help is at hand with the Pink Finance Guide to Mortgage Types and Rates.

Even if you're not looking to move house, you could consider moving your mortgage and saving bundles of cash.

Methods

The way you repay your mortgage has come under great scrutiny lately, with Endowments under pressure and past advice being questioned. There are principally two methods of paying back the debt that remain.

Capital Repayment

A ‘standard’ repayment mortgage means that you repay a portion of the outstanding balance each month alongside the interest to the lender.

It is common for a daily interest mortgage to be more efficient than a monthly, or annual one. As you are paying back the capital, there is a set date in the future that the balance will be fully repaid.

A Capital Repayment Mortgage is viewed as a safe option, with an element of certainty attached. The majority of new mortgages being taken by homeowners are on this basis.

Interest Only

The more speculative homeowners are still entertaining the idea of repaying their debt via returns earned through the stock market. Instead of using an Endowment Policy, they are using an alternative investment plan such as an Individual Savings Account (ISA).

The Capital amount borrowed from the lender does not reduce over the term of the mortgage, and remains level throughout. The borrower services the interest due on the outstanding balance each month.

As the returns within the ISA are reliant on the stock market, it goes without saying that this type of mortgage is not as safe as Capital Repayment. However, should investment returns go well there is always a chance that the mortgage could be repaid earlier than the term.

Rates

Once you've selected the way in which your mortgage is paid back to your lender, you need to choose the way in which interest is charged to your account. The following is a list of the main types of interest rate deals you will be faced with when exploring mortgages.

Fixed

With a Fixed Rate you will know exactly the amount of interest you will be charged on your mortgage account. Fixed Rates are normally taken for a set period of time, for example, 1, 2, 3 or 5 years.

You need to think carefully before selecting a period of time, as redemption penalties are normally charged during the ‘Deal’ period.

Those taking a Fixed Deal to avoid those that tie the borrower past the deal term should question the lender carefully about any ‘overhanging’ penalties.

Fixed Rates are particularly suited to homeowners who want to know how they stand with their monthly repayments.

Discounted

Lenders commonly offer discounts to their ‘standard rate’ for set periods of time. These rates will alter as the Bank of England base rate alters, and the amount of interest charged to your mortgage account varies.

These deals are also for set periods of time, such as 1, 2, 3 or 5 years. They also may contain redemption penalties during, or after, the ‘Deal Period’.

Once the discount period ends the interest rate reverts back to the lenders standard variable rate. Discounted rates can offer good value to new mortgage holders and can offer low mortgage repayments, especially in the early years of a new loan.

Discounted Rates are suited to both first time and existing mortgage holders.

Tracker

Many mortgages these days will commit to tracking the Bank of England Base rate. These mortgages may have a tracking term of say 1, 2, 3 or 5 years, but can also be for the whole life of the mortgage.

The amount of interest charged to the mortgage account will be a set amount above the base rate. For example, if the tracing rate is .75% above, at a base rate of 4%, you will be charged 4.75%.

These deals may be slightly more expensive in the short-term, but work out good value in the medium to long-term.

This means they tend to be more suited to established homeowners, who possibly have more disposable income each month.

Capped

Similar to Fixed Rates, these deals offer the opportunity of placing a maximum ceiling on your mortgage repayments. They also have a set period of time, such as 1, 2, 3 or 5 years and can again carry penalties during, or after the term of the deal.

Capped are different to Fixed Rates, as they offer the opportunity of a reducing interest, should the Base Rate reduce. This would appear to give the best of both worlds and can prove a good idea in uncertain times.

However, these rates are not always offered by lenders and tend to be more expensive than a pure Fixed Rate. They should be examined closely to check exactly at which point the rate payable starts to reduce.

Capped Rates tend to be more suitable to experienced mortgage holders who have a good grasp of interest rate movements. You should compare the pricing of Fixed and Capped before committing.

Variable

Variable Interest Rates tend to be the lender's ‘standard’ mortgage rate. This rate tends to be the follow-on rate that applies after a Deal Term. If you're being charged variable interest on your current mortgage, you should seriously consider changing to a new lender.

Very few new mortgages are taken on this type of interest rate, as there are so many special Fixed, Discounted, Tracker and Capped Interest deals.

Variable Interest Rate Mortgages are suitable for very few groups, and tend to be expensive. Lenders are not to forthcoming in letting you know that you are paying too much interest on your mortgage, so you should check yours out now!

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