Securing a mortgage is a huge financial commitment, perhaps one of the biggest you will ever make during your lifetime. As such, it’s important to choose the right type of mortgage for your needs.
We know that navigating the mortgage market can be incredibly overwhelming, particularly right now with interest rates higher than they have been in a number of years. That’s why we’ve put together this simple, comprehensive guide to the different types of products that are available to you as a borrower.
Comparing different types of mortgage deals
When borrowers secure a mortgage, they run the natural risk that interest rates may rise in the future and increase their monthly repayments. The worry is that these repayments can increase to the point that you can no longer afford them anymore.
This is why borrowers need to limit their risk by choosing the right type of mortgage for their needs and circumstances. When considering what type of mortgage to apply for, it’s also important to remember that timing is also a key factor. Due to changes in the UK economy, there are some times when it is better to take out a certain type of mortgage over others, i.e. sometimes a tracker mortgage is the smartest choice rather than a fixed-rate, and vice versa.
In general, mortgage deals fall into two categories: fixed-rate or variable. Below, we have outlined the five main types of products that are available on the market and what sort of rates they entail, so that you can consider which option may be best for you.
1/ Fixed-rate
What’s the risk? Low
Who’s it for? First-time buyers or cautious buyers/homeowners.
The main benefit of a fixed-rate mortgage is that you will know exactly how much interest you’ll pay for the duration of your deal.
This type of security can be incredibly beneficial for first-time buyers, or for those who are more cautious and/or do not have the financial cushioning required to take risks.
You will be in a secure position due to the stability of your interest-rate, but won’t benefit from a scenario in which rates fall. When your fixed-rate deal is coming to an end, it’s important to remortgage to a new deal so that you do not end up paying more due to your lender’s SVR (Standard Variable Rate).
2/ Tracker (variable)
What’s the risk? Medium
Who’s it for? Buyers/homeowners who are happy to bear the risk of paying more in return for the chance that they may end up paying less.
Tracker mortgages are subject to changing external interest rates, typically the Bank of England base rate. Of course, the primary benefit is that when the external rate falls, your interest rate falls, too. However, your interest rate will also rise if the external rate rises. So it can really go one of two ways.
A tracker mortgage can be a smart choice when the base rate is falling or looks likely to fall soon.
3/ Discounted (variable)
What’s the risk? Medium/High
Who’s it for? Buyers/homeowners looking to benefit from the lowest rates who have the financial security to help them cope with unpredictability.
If you’re looking for extra-low rates and have the financial stability necessary to take risks, a discounted mortgage could be for you.
It’s important to bear in mind, however, that the discounted period will have a limit, and unlike a tracker mortgage, your rate will move in line with your lender’s SVR rather than the base rate. This means you run the risk of higher, unpredictable increases to the rate you are subject to.
4/ Standard Variable Rate (variable)
What’s the risk? High
Who’s it for? Buyers/homeowners who can afford to pay more if needs be, or who cannot secure any other type of deal.
A standard variable rate mortgage will move in line with your lender’s SVR. Interest rates can seem affordable at the beginning, but can rise rapidly at the drop of a hat, making this a very unstable type of mortgage deal.
5/ Offset (can be fixed-rate or variable)
What’s the risk? Low/Medium
Who’s it for? Buyers/homeowners with variable income but a strong savings account.
If your income tends to fluctuate, perhaps because you are self-employed, then you may be interested in an offset mortgage, if you have substantial savings behind you.
Offset mortgages allow you to ‘offset’ the amount you are required to repay on your mortgage against the savings you possess. They are designed to lower the total amount of interest you are required to repay.
Your savings will be held in an account run by your mortgage provider, and the amount you have behind you will be subtracted from the total cost of your mortgage on which you are paying interest. For instance, if you are in receipt of a loan of £200,000, and you can offset this against a total of £30,000 in savings, you will only pay interest on £170,000 of your loan.
It’s important to bear in mind that your savings will not accrue any interest for as long as they are used to offset your mortgage.
Looking for guidance with your mortgage? Our advisors here at The Mortgage Brokerage can help you secure the most competitive deal in line with your needs. Simply contact us today.
