Within a mortgage product, you will discover that there are several different kinds of mortgages to choose from. The best mortgage deal will depend entirely on your individual situation. The fact each person’s circumstance is slightly different means that there are mortgage deals to suit. The best mortgage deal for you may mean your monthly repayments stay the same each month. However, you may prefer a fluctuation. The main types of mortgage deals are as follows:
A tracker mortgage tracks the Bank of England base rate, applies it, and adds an additional set percentage rate. For example, if you select a mortgage deal with a 2.5% set percentage rate from the lender and the Bank of England’s base rate was 0.3%, your payable mortgage deal would be 2.8%. However, if the base rate dropped as low as 0.15%, you would benefit from a reduced rate. Although the same applies if the base rate rises, making it more costly.
Fixed rate mortgages stabilise your monthly payments to the same amount each month, regardless of what’s happening to the Bank of England base rate or the property market. This can give you peace of mind. When arranging your mortgage deal, you agree a set rate for a certain period. Typically, this fixed rate ranges from two to five years. It is possible to fix it for longer, should you want to, however, it’s advisable to asses the market every so often to see if you can secure a better mortgage deal.
Discounted mortgages offer an upfront discount off the lender’s Standard Variable Rate (SVR). This is usually for the first few years of your mortgage deal, before it switches back to the SVR. Your lender’s SVR is subject to change, making your payments increase or decrease throughout the term of your mortgage deal.
A capped rate mortgage is a variable rate, so your monthly repayments can fluctuate. However, the rate can be capped so that it will never go above a certain limit. You may choose this mortgage deal, if you are under the impression that mortgage rates will fall, so you can reap the rewards. But, at the same time, you want that added protection, so that there’s a cap in-case they increase.
The idea behind an offset mortgage is to use any savings you have to reduce the amount of interest you pay overall. Imagine you have a £250,000 mortgage and £45,000 in additional savings. You can offset these savings against your mortgage so that you only pay interest on £205,000 of your mortgage deal. The savings are still accessible whenever you choose, but that’s what makes rate on offset mortgages slightly higher than standard mortgages.
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