The finance industry is flourishing in the UK to facilitate more and more ease to the people. The mortgage market is not an exception, and there are the numbers of types of mortgages with different features. The information below takes you through the types and explains their nature.
The types of mortgage you will read about
Repayment Mortgages, Interest-only Mortgages,
Fixed-Rate Mortgages, Variable Rate Mortgages,
Tracker Mortgages, Discounted Rate Mortgages,
Capped Rate Mortgages, Offset Mortgages,
Repayment mortgages – This type of mortgage is the most popular among all the other types. The borrower pays the borrowed money through the monthly instalments. The instalments include the principal amount and interest. In the first few years, the major part of the repayment contains interest. 75% to 90%/95% of the part of an instalment is interest only.
Interest-only mortgages – As this financial term suggests, when the borrowers pay only interest as the instalment, it becomes an interest-only mortgage. It is not much popular among residential mortgages. However, in the commercial mortgages, especially the buy-to-let mortgages where the landlord aims to repay through received rent. Due to only interest as the repayment, the instalments are small, rest of the repayment left from the rent is invested in other projects.
Fixed rate mortgage – Again, something that you can predict by its name. Yes, fixed-rate mortgages offer funds on a specific rate that does not change. As a result, the monthly payments remain the same in amount. But this static rate remains for a decided durations.
Usually, the duration of the fixed rate is between 2 to 5 years. Once this period is over, the variable rate applies to the mortgage, and the borrower pays the instalments accordingly. Those who want to keep certainty on your monthly expenses and cannot afford the risk of changing rates opt for this option.
Variable rate mortgage – This type of mortgage is volatile. It is decided by the lender according to its lending policies and can be changed anytime. It makes the instalments vary in amount. They can keep improving, and according to that, the repayments can either squeeze or swell in size.
One benefit of this type of mortgage is that sometimes rates go down in an unprecedented manner. At that time, the borrower can exploit a great advantage of small instalments. The current time is the best example of how variable rate mortgage can be beneficial. The mortgage rates are extremely low due to the unprecedented drop of base rate that is currently 0.1% due to corona pandemic. The existing borrowers are paying less on the mortgage, and new applicants are happy as they are getting funds on lower rates.
Tracker Mortgages – The mortgage products that follow the base rate of the Bank of England with a set rate are called the tracker mortgages.
An example can explain it well. The tracker mortgage is base rate + set percentage
The current base rate is 0.1%, and if the set percentage is 2%, the tracker rate will be 2.1%.
The rate that is set on a certain amount and is lower than the variable rate of the lender is called a discounted rate mortgage. This rate remains either for a specific time such as 2 to 5 years or the complete mortgage duration. The discounted rate may change as it depends on the variable interest rate set by the lender.
Discounted Rate Mortgages – The rate that is set on a certain amount and is lower than the variable rate of the lender is called a discounted rate mortgage. This rate remains either for a specific time such as 2 to 5 years or the complete mortgage duration. The discounted rate may change as it depends on the variable interest rate set by the lender.
To prevent the excessive volatile changes in the mortgage costs, many borrowers pick the options of tracker mortgages. They want to play safely in their mortgage payments, and this type is a suitable choice for them.
Capped Rate Mortgages – These are also like variable-rate mortgages, but the most significant difference is that for a specific time, the interest rate cannot rise. But this cap is applicable for 2 to 5 years. What duration a borrower gets entirely depends on his/her financial conditions.
Sometimes people confuse it with a fixed-rate mortgage, but both are different. In a fixed rate, the rates remain static and do not rise. However, in the capped rate mortgage, the interest rate increases but does not cross a limit.
Offset mortgages – these are entirely different from the other types. In offset mortgages, the borrower can use his savings to lower the interest rate. The savings are used to compensate for the equal amount from the mortgage.
If the borrower has a mortgage of £200,000 and he has a savings of £20,000, then the saved amount can be used to offset mortgage. This means that the borrower needs to pay interest only on £180,000. It can be called the safest mortgage type because every time borrower wants to lower the rates, he can use his savings and can drastically bring down the rate of interest.
Isn’t it great to have such a variety of mortgage types???
Perhaps no borrower can remain disappointed with such a long list of mortgage options. Interest rate is the most uncertain part for the borrower, and he always wants to find ways of attaining ease on that part by paying less. The above choices give that ease in some or other means according to their nature. Explore them and exploit them for your financial well being and a balance in mortgage cost.