Mortgage Types

Below are the different types of mortgage offered by lenders and an example when each should be considered: -

Variable - this is set at the lender's standard variable rate (SVR) and will generally vary with Bank of England Base Interest Rate movements. There are no Early Repayment Charges applying if the mortgage is redeemed.

Potential Use: - the borrower does not want any penalties should they have to redeem the mortgage in the near future thus providing flexibility

Discounted Variable - this is the lender's standard variable rate (SVR) less a set amount for a fixed period of time e.g. 6% -1.5% for two years. The SVR can vary; therefore monthly repayments during the discounted payment can also vary. There are normally Early Repayment Charges applying during the discounted period if the mortgage is redeemed.

Potential Use: - the borrower does not expect interest rates to rise sharply and may indeed expect them to fall during the period of discount and is aware that a redemption penalty may also be applicable during this period

Tracker - this is similar to the Discounted Variable, but the rate is normally the Bank of England Base Interest Rate plus a set amount or premium for a period of time e.g. 4% + 0.75% for two years. This type of mortgage tends to move up or down as soon as the Bank of England Base Interest Rate is raised or lowered. There are normally Early Repayment Charges applying during the tracking period if the mortgage is redeemed.

Potential Use: - same as Discounted Variable, but may be looking to take advantage of quick changes to the rate particularly if the borrower expects rates to fall

Stepped - this is the same as Discounted Variable or Tracker with the difference being that the discount or premium changes in favour of the lender at set intervals during the special rate period. There are normally Early Repayment Charges applying during the discounted or tracker period if the mortgage is redeemed.

Potential Use: - the borrower is expecting annual increases in income and wishes to begin the repayments particularly low to reduce outgoings in the first year. They are also confident that they will be able to cope with the increase in monthly payments after the set intervals whilst bearing in mind that the rate can vary

Capped - this is a variable rate mortgage which gurantees the interest rate charged will not rise above a certain level, but may fall in line with variable rates. There are normally Early Repayment Charges applying during the capped period if the mortgage is redeemed.

Potential Use: - the borrower wants the advantage of a discounted rate, but knows that in the event of interest rates rising, they can only rise to a certain amount

Fixed - this is when the interest rate is fixed at a level lower than the lender's standard variable rate for a fixed period of time normally 2,3 or 5 years although longer periods can be obtained. There are normally Early Repayment Charges applying during the fixed period if the mortgage is redeemed.

Potential Use: - the borrower wants to know exactly how much they will be paying each month particularly useful for people on a budget

Offset/Current Account - this is generally offered on the lender's standard variable rate and uses the interest normally accrued on savings or positive balances on a current account to reduce the interest charged on the borrower's mortgage account. There are generally no Early Repayment Charges for redeeming the mortgage and some providers of such mortgages have a lower standard variable rates on these products.

Potential Use: - the borrower has a sizeable amount of savings, which they wish to retain access to, but are happy not to earn any interest on in the meantime. They can also be tax-efficient for higher rate taxpayers as the interest that would normally be earned would be taxed at the higher rate, but is instead being used to reduce the mortgage repayments or term