There are different types of mortgages available today in the UK market. To understand which one to apply to, you need proper market research and an understanding of your requirements. Mortgages work in a similar manner but vary on interest rates, payment methods, conversion into products, etc. This confuses a lot and can be overwhelming. To help you we try to put it all in this article to explain kinds of mortgages. We will point out the similarities and differences between the mortgages
Most mortgages are repayment mortgages. If you are looking to own a house on loan and want to own it at the end of repayment duration, a repayment mortgage is an option. It is a kind of mortgage where you borrow a capital amount at an interest rate. The target is to pay back the original amount and the interest on it. To get out of this mortgage, you need to pay the loan and interest or port your mortgage towards your new home.
This mortgage is like a repayment mortgage but with a different way of repayment. Here any payment to the lender won’t be towards your principal loan but only towards your interest. This helps you in lowering down your monthly payments. You definitely have to pay the principal amount at the end of the mortgage. So this lower monthly payment gives you enough time to accumulate the loan amount. Now there are few underlying things that need to give more attention. Since you will be paying interest on the principal amount every month you will end up paying more as compared to a Repayment mortgage. And if you are not ready with the lump sum amount at the end of the payment term then you will risk losing the house/security to cover.
This kind of payment system is generally avoided due to many risks. People generally end up taking loans for those things which might be unaffordable for them if this kind of loan is not available. This kind of loan actually played a role in the housing market crash in 2008. This loan would be suitable for the person who is sure that his income is going to rise in the coming years.
As the name suggests fixed-rate mortgage, the rate of interest will be fixed for a period and won’t get affected by any change in interest by the Bank of England. This is a kind of Interest-only mortgage that offers surety of the amount deducted every month for a period and gives the person a kind of certainty. Certainty to design their budget for coming days, certainty on the decision of having a house. This kind of mortgage is also good when you have an idea of the increase in interest rates in the coming days. Generally, people at the end of a mortgage, remortgage it at better rates. For this, you need expert guidance.
Now let’s talk about the downside of it. Once you are at the end of the duration of the fixed rate then the lender might charge you a higher rate of interest. One should be careful about the terms and conditions. Once you have decided to go ahead with a fixed rate, it will be difficult to shift in the future. There will be an exit cost while leaving the fixed rate which can be hefty. Also, you won’t be able to reap the benefits if the interest rates fall down.
That brings us to Variable Rate Mortgage. The main difference between fixed and variable rate mortgages is how they calculate the interest rates. In Fixed-rate, how it is fixed for a fixed duration of period, variable interest can be high and low depending on the bank of England base interest rate. There are few other factors also involved in the interest rate calculation. Based on that we have listed a few more types of variable rate mortgage.
The SVR in which the rate is decided by the lender. The lender can then decide the rate every month and these rates are independent of the Bank of England Base rate. SVR is generally applied to the lender who has just finished their fixed-rate mortgage duration or any introductory offer. This is generally expensive and people can look into moving to new mortgage deals. SVR enables people to overpay and get rid of the mortgage itself. This is also for the people who buy and sell homes for investment purposes.
This mortgage tracks the Bank of England Base interest rate and gives you an interest rate based on that. The lender adds a few percentages to the interest rate and offers you the rate which goes up and down along with the BoE interest rate. These kinds of mortgages are generally a part of incentive offers by lenders to attract customers. Once the offer is over, customers move to SVR. Some of the lenders have marked a floor rate below which the interest rates won’t go or capping on high rates. So again one needs to be very careful if they are going for this kind of mortgage.
As the Tracker Mortgage is pegged to the Bank of England interest rate, the Discount mortgage is pegged to Lender‘s SVR. The amount of discount is fixed for the customer and the effective rate of interest will be the difference between SVR and the discount percentage applied. For example, if the SVR is 5% and your lender gives a fixed 2% discount, you will then pay a 3% mortgage rate. So the rate you are paying is determined by your lender and you won’t be able to control the figure of your interest rate. Like the tracker mortgage, the discount mortgage is used by lenders to attract customers. Some market leaders tend to vary the SVR based on their internal factors rather than the Bank of England rates. The advice is to take if you can adjust the increase in SVR for some time.
There are various other kinds of mortgages which are variations of the mortgages mentioned above. Understanding which kind of mortgage is needed depends a lot on the requirements, your income capacity, and expert advice.
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