TYPES OF MORTGAGE
Before you chose a specific deal, you need to decide what type of mortgage is the most appropriate for your needs. Your Coast To Coast Adviser will talk you through the various options, but here's a brief summary.
Your monthly payment fluctuates in line with standard variable rate (SVR) of interest, set by the lender. You probably wont get penalised if you decide to change lenders and you may be able to repay additional amounts without penalty too. Many lenders wont offer their standard variable rate to new borrowers
Your monthly payment fluctuates in line with a rate that’s equal to, higher, or lower than a chosen Base Rate (usually Bank of England Base Rate). The rate charged on the mortgage ‘tracks’ that rate, usually for a set period of two to three years. You may have to pay a penalty to leave your lender, especially during the tracker period.
You may also have to pay an early repayment charge if you pay back extra amounts during the tracker period. A tracker may suit you if you can afford to pay more when interest rates go up – and you’ll benefit when they go down. It’s not a good choice if your budget won’t stretch to higher monthly payments.
With a fixed rate mortgage the rate stays the same, so your payments are set at a certain level for an agreed period. At the end of that period the lender will usually switch you onto its SVR (see variable rate). You may have to pay a penalty to leave your lender especially during the fixed rate period. You may also have to pay an early repayment charge if you pay back extra amounts during the fixed rate period.
A fixed rate mortgage makes budgeting much easier because your payments will stay the same – even if interest rates go up. However it also means you won’t benefit if rates go down.
Like a variable rate mortgage, your monthly payments can go up or down. However, you’ll get a discount on the lenders SVR for a set period of time, after which you’ll usually switch to the full SVR. You may have to pay a penalty for overpayments and early repayment and the lender may chose not to reduce (or delay reducing) their variable rate – even if the Base Rate goes down.
Discounted Rate mortgages can give you a gentler start to your mortgage at a time when money may be tight. However, you must be confident that you can afford the payments when the discount ends and the rate increases.
These schemes allow you to overpay, underpay or even take a payment ‘holiday’. Any unpaid interest will be added to the outstanding mortgage; any overpayment will reduce it. Some have the facility to drawn down additional funds to a pre-agreed limit.
Capped and collared rate
Some lenders offer variable tracker or discounted products that have a pre-defined upper ‘cap’ or lower ‘collar’ that the rate will not breach when rates go up or down.
Taking out an offset mortgage enables you to use your savings to reduce your mortgage balance and the interest you pay on it. For example, if you borrowed £200000 but had £50000 in savings, you would only be paying interest on £150000. offset mortgages are generally more expensive than standard deals but can reduce your monthly payments, whilst still giving you access to your savings