Mortgage types: seven basic mortgage types
Variable Rate Mortgages – This is your standard mortgage type. It attracts the lenders SVR. The SVR rises and falls with the market. If the bank opts for raising the interest rates, then your SVR is going to go up, and it’s the same with lowering the rates. So to put it simply your mortgage can become more expensive or less depending on the market.
Fixed Rate Mortgages – These come with rates that are fixed just like the name implies. They offer you stability on your payments. A fixed rate mortgage is good for budgeting during those early years of the loan. They’re good for tight budgets. The risk is that the market rates fall at this time while you’re still paying a higher rate. Usually the fixed rate mortgages will convert to the standard variable rate mortgages anywhere from two to five years.
Flexible Mortgages – Flexible mortgages are good for a borrower who is expecting changes in the circumstance of their finances. They are for people who are self-employed and can sometimes afford making overpayments but also may need to take an occasional ‘repayment holiday’.
Cashback Mortgage – This type of mortgage provide you with a lump sum. This sum can be fixed or a percentage of your borrowed total (3 to 6 percent usually). The drawback is higher monthly payments, and if you, as the borrower, decide to pay off the entire mortgage within so many years (like 3 to 5 years) your cashback has to be paid back as well.
Discount Rate Mortgage – In this case your interest rate comes with discount rates over a fixed period. This discount relates to your lenders prevailing SVR. If you get offered a discount of 1% and the SVR is at 6%, then you only have to pay 5%. Should the SVR fall to 5% then you pay 4%. The repayments fall or rise with the market, and this continues until the end of your discount period, then the mortgage will revert back to the old standard variable rate.
Current Account Mortgage – These combine your current account and your mortgage resulting in a large overdraft. It keeps nearly all your finances in one place. The benefit is being able to make use of any of your funds stored in your current account to put up against any outstanding mortgage in the overdraft.
Capped Rate Mortgages – These mortgages combine the good points of the fixed rate and the discount rate mortgages. A maximum interest rate is guaranteed over a fixed period of time, and if the SVR should fall under that rate then you would pay that lower rate. This means the interest varies but won’t exceed your agreed to cap. Many capped mortgages don’t just have the upper limit but a lower limit as well. These are known as a ‘cap and collar’ mortgage type.