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When it comes to obtaining a mortgage to buy a home, the basic principle of the mortgage is the same. It is money that you borrow in order to buy property and then you pay interest on the loan, eventually paying off the mortgage. However, there are many different types of mortgages to choose from and it may be that one or some are more relevant to you than others.

Fixed rate mortgages

This is a mortgage that comes with a fixed rate over a number of years. The time period for the fixed rate will be agreed before the mortgage is agreed. The common length of the fixed rate period is two or three years but it is possible to obtain fixed rate mortgages over five or even ten years.

This is a good mortgage for people who want to know exactly what they have to pay each month for the duration of the fixed length period. There are some drawbacks to this style of loan, notably that the initial interest rate is usually higher than variable rate mortgages. However, if interest rates rise, you may find that you save money with a fixed rate mortgage, which is a very strong reason to choose this option.

Your personal finances and circumstances will dictate if this is a mortgage you should be interested in but for many people, the consistency of monthly payments is an attractive feature for the fixed rate mortgage.

Variable rate mortgages

You will find that every lender has their own Standard Variable Rate, SVR, mortgage and this will be their standard offering. It is important to be aware that with this style of mortgage that the Bank of England base rate is often the key factor but the interest rate for the mortgage can go up or down for various reasons.

The lender is in a position where they can set the rate that works best for them and this means that commercial factors may influence the rate they want to offer. If you believe that interest rates or the lender’s own rate will fall, this is a good choice of mortgage but you need to make sure that you can afford to meet the monthly mortgage payment is rates rise.

Tracker mortgage

This style of mortgage is a type of a variable rate mortgage but it is clearly pegged to the Bank of England base rate. The tracking rate moves in accordance with the base rate. This means if the base rate rises, the mortgage rate rises and if the base rate falls, the mortgage rate falls.

As an example, if the Bank of England base rate was at 0.5% and the pegged rate of the lender was 1.25%, the mortgage rate would be 1.75%. If the Bank of England base rate fell to 0.25%, the mortgage rate would drop to 1.50% while if the base rate rose to 0.75%, the mortgage rate would rise to 2%.

Whether this mortgage rate is right for you will depend on whether you believe the base rate will rise or fall and whether you are happy with the pegged level of the tracking rate.

03/11/17

Different types of mortgages explained

by Geoffrey Matthew
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