When you decide that it is the right time for you to take a mortgage, it is very important to know which one of the many types will be suitable for you, and how it really works. The following are the types of mortgages that currently exist.
Variable- rate mortgage:
This mortgage is divided into different types namely discount mortgages and tracker mortgage.
It earns the name discount because the interest is set at a particular rate less than the lender’s standard variable charge, for a given time.
For instance, it the lender’s SVR is 5% and has a discount of 1 %, the rate he is supposed to pay will be 4%. This type of mortgage usually lasts between 2 and 5 years. Once the deal has terminated, the lender then transfers you to its SVR automatically.
The advantage of discount mortgage:
- Definitely, your rate will be below the lender’s SVR during the whole deal time. this signifies that the interest rate is very low.
Disadvantages of discount mortgage:
- There is a possibility that you may have to make early repayments charges suppose you become a defaulter or pull out of the deal.
- It does not give you the real rate stability as your discount is always in connection with
In this type, the interest rate is determined from the base rate of the Bank of England. When the mortgage deal is finished, you will get an automatic transfer to the lender’s SVR, meaning that the rate of interest will be higher.
Advantages of tracker mortgage:
- The mortgages rate does not depend on the lender’s SVR. As the only thing it has is a change in the base rate
- Because it is relatively low, you may also overpay the mortgage so that you can cut short the length which you were supposed to pay the mortgage fully. Also, smaller subsequent payments can be done on a monthly basis.
- The rates of interest are generally low
Disadvantages of tracker mortgage:
- An early repayment fee will be charged if you decide to abandon the tracker mortgage deal before it matures.
- It does not give you the complete rate security because if there is a change in the base rate, the interest rate changes too.
- It does not give you the option of knowing your real monthly repayment because the rate is not fixed.
Fixed rate mortgage:
This is the type of mortgage that has a fixed monthly repayment charge throughout the deal’s duration. The duration might lie between 2 and 5 years. Upon finishing the period, you will be transferred to SVR automatically.
Advantages of fixed rate mortgages:
- The interest rate is flat throughout the agreed period. This means you know your actual monthly fee to be paid.
- They are fairly a cheap alternative
- Since the interest rate is the same, the market base rate will not affect you if rises or falls.
Disadvantages of fixed rate mortgages:
- Since the rate is flat, the other market rate (base rate) may fall, meaning that you will be paying a higher rate.