Variable Rate Mortgage
A Variable Rate Mortgage is based on a lender’s standard variable rate (SVR).
A lender’s SVR is determined by the lender and the most significant influence on this rate is generally movement on the Bank of England’s base rate. SVRs vary from lender to lender but typically track at a fixed percentage above the Bank of England base rate.
While the Bank of England’s base rate may well influence SVRs it is not guaranteed that changes in the base rate will reflect in changes in the SVR.
Discounted Variable Rate Mortgage
A Discounted Variable Rate Mortgage is offered at a rate that is discounted from the lender’s standard variable rate (SVR) for a set period – usually two years, though some could be up to five years in length. As the lenders SVR moves up or down, the discounted rate moves up or down by the same amount.
Tracker Rate Mortgage
This mortgage type follows movement in the Bank of England base rate at an agreed differential. The Tracker rate mortgage is usually available for a fixed period or the lifetime of the loan. The most common tracker rate period is two years, though many mortgage lenders now offer three, five or even ten year tracker rate mortgages.
If the tracker rate is for a set period of time, the mortgage will revert to the lender’s standard variable rate (SVR) at the end of the tracker rate period.
A Flexible Mortgage gives you some scope to change your monthly payments to suit your ability to pay. It’s also useful if you want to pay off your loan more quickly. Several flexible features are becoming common and they aren’t limited to mortgages with ‘flexible’ in their name. Here are some flexible features:
- Overpayments – depending on your mortgage you may be allowed pay more than your normal monthly payments, pay off a lump sum, or both.
- Underpayments and payment holidays – you may be allowed to pay less than the normal monthly payment for a limited period (say six or twelve months). You may even be able to stop making payments altogether (a payment holiday) for a period of time. This could be useful if, say, you lose your job and do not have mortgage insurance or take time off to care for a child.
- Borrow extra (loan drawdown) – you may be able to borrow extra without further approval from your lender, provided the total loan does not go above an overall limit. Alternatively you may be able to ‘borrow back’ against earlier overpayments.
An Offset Mortgage allows for your main current account or savings account (or both) to be linked to your mortgage (all are usually, but not always, held with the mortgage lender). Each month, the amount you owe on your mortgage is reduced by the amount in these accounts before working out the interest due on the loan. It’s like a reward for frugal banking by your lender.
So as your current account and savings balances go up, you pay less on your mortgage. As they go down, you pay more.
Fixed Rate Mortgage
As the name would suggest, a Fixed Rate Mortgage is one where the monthly repayment amount is fixed for a specified period irrespective of changes to the Bank of England’s base rate or the lender’s standard variable rate (SVR).
Fixed rate mortgage schemes generally last two to five years, although longer terms are available. At the end of the fixed rate period the interest rate will revert to the lenders standard variable rate (SVR). A fee called an early redemption penalty is likely to be applied if you chose to cancel your fixed rate mortgage within the fixed rate period.
Capped Rate Mortgage
This is similar to a variable rate mortgage, in that its rate will rise and fall, at least in part, following the Bank of England base rate, but a ceiling will have been set above which the rate will not be allowed to rise – this is known as the ‘cap’.