There are many different mortgage products currently available on the market offering various rates of interest. The amount of interest payable on a mortgage is partly determined by the type of mortgage you purchase. The type of mortgage may affect the interest rate and amount charged, but it may also carry other advantages and disadvantages typical of the mortgage type.

1. Base Rate Tracker
2. Fixed
3. Capped
4. Discounted
5. Offset and current account mortgages
6. Cash back
7. Flexible / lifestyle mortgages
8. Negative equity schemes
   

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Mortgage interest rates for Base Rate Tracker Mortgages are linked to the cost of borrowing from the Bank of England . It is Important to be aware that most mortgage lenders who reflect the base rate in their own interest rates do charge a premium above the base rate. Base Rate Tracker Mortgages are now offered by a number of lenders, the base rate is reviewed once a month. This system offers the certainty that any rise or fall in your mortgage interest rate will be consistent with base rate changes of the Bank of England.

Discounts are offered with base tracker mortgages by a number of lenders, though when the discount period finishes borrowers realise the true costs of their mortgage. Borrowers should be aware that if the payment shock of this period ending leads them to have second thoughts, redeeming this product early could bring redemption charges.

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Fixed rate mortgages

On a Fixed rate mortgage your mortgage interest rate will be fixed for a period. This fixed rate is independent of external interest rates in the market place.

Advantages

This puts clients in a better position to predict and be certain of the household budget.

Disadvantages

There are charges to watch out for; there is normally a booking / arrangement fee and often an early redemption fee. The often-heavy charges involved in paying fixed rate mortgages off early can act like a lock , as there is a financial penalty for doing so. If Interest Rates were reduced during this period, this type of mortgage may prove more costly than products that allow more flexibility.

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	Capital and Interest mortgages allows the borrower to pay off the loan over a fixed period.

Advantages

If you choose a capped rate mortgage an Interest rate limit for your mortgage is set; instead of the Interest rate being fixed it accommodates reductions in the Standard Variable Rate (SVR). The borrower's payments will be lower if the variable Interest rate lowers though interest rates will not go any higher the than the capped rate.

Disadvantages

As with the fixed rate mortgage there are charges to watch out for; there is normally a booking / arrangement fee and often an early redemption fee. The often-heavy charges involved in paying fixed rate mortgages off early can have the affect of locking borrowers into their mortgages; as there is nomally a financial penalty for early repayments. If external interest rates were reduced during this period, this type of mortgage may prove more costly than products that allow more flexibility.

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	Capital and Interest mortgages allows the borrower to pay off the loan over a fixed period.

Discounted rate mortgages

Borrowers are guaranteed a discounted mortgage Interest rate for a fixed period of time. The discount rate is normally linked to the standard variable rate; the interest rate applied by the lender.

Example

If the discount were 1.5% and was discounted from the standard variable rate (the interest rate applied by the lender) and the standard variable rate is 6% the new discounted payable rate will be 4.5%.

You must be aware that the discount rate is normally linked to the standard variable rate and payments will rise and fall with the standard variable rate. There is no certainty for the household budget as rates could increase or decrease. If the Standard variable rate decreases the borrower will benefit from lesser payments.

The Stepped discount is another version of a discount mortgage and usually follows this form.

Example

3% may be discounted from the Standard variable rate (interest rate applied by the lender) for the first twelve months, then 2% may be discounted for the following twelve months followed by 1% to be discounted for the next twelve months after that.

Borrowers must be aware of the payment shock that could be experienced when they realise the true cost of their mortgage.

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Offset and current account mortgages

The offset mortgage uses funds held in your savings or current account to offset the interest on your mortgage.

Advantages

With these mortgages you could pay less interest because of money held in savings and current accounts. The more savings you have the less interest is paid on your mortgage, allowing you to repay your mortgage faster, more efficiently and ultimately saving you money.

	Capital and Interest mortgages allows the borrower to pay off the loan over a fixed period.

Disadvantages

As part of this deal you do not receive any interest from your current account. Interest tends to be set at higher rates; this is due to the added risks for the lender. It’s not suitable for everyone, as it can require a lot of discipline financially.

A word of caution, these mortgages are not necessarily for the majority; most people are already living off their overdraft and rely heavily on credit attaining expensive rates of interest. This method of financing a mortgage could potentially lead to paying more interest unless properly managed.

Example

If a borrower has an existing mortgage balance of £80,000 and had funds of £5000 with the same lender in an appropriate current account the borrower would only pay interest on £75,000 of the loan.

Find out how much interest you could save as a result of these flexible mortgage benefits.

Borrowers with unpredictable incomes often find these mortgage benefits especially useful; among them are the self-employed and those who are often paid large bonuses. Prospective borrowers with significant savings also frequently find the opportunities these benefits offer very appealing.

Example

If your monthly take-home pay is £2000, your monthly outgoings are £1,800 including your monthly mortgage repayments, and then £200 is left. The £200 remaining in your account is taken off your mortgage debt. Now you only pay interest on the smaller debt so you can repay more capital and be charged less interest.

The lender expects the loan to be repaid before the borrower retires and it is normally required that you have earnings paid directly into your account . Account holders are issued with a chequebook to withdraw funds for any purpose. The maximum borrowing limit cannot be exceeded and the outstanding balance must be regularly reduced.

It’s worth noting Flexible mortgage Interest rates may be arranged on a fixed, capped, discounted, variable or base rate tracker basis.

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Cashback

A sum of money can be received from the lender on completion of your mortgage with some deals; this is either a fixed amount or an agreed percentage of the loan.

Example

A borrower had a mortgage of £100,000, the mortgage term is over and payments are complete. The borrower could get a flat fee cash-back e.g. £500, or he could get an agreed fixed percentage of the loan as a cashback e.g. 5%; 5% of £100,000 would work out at £5000.

Advantages

Off course quick cash injections are always welcome and can enhance the satisfaction of completing payments on a mortgage.

Disadvantages

Not always the best option; the majority of lenders apply redemption charges of the cash-back receivable, which can serve to lock the borrower into a deal for five to seven years. Mortgages that offer cash-backs normally operate with the lenders standard variable rate. This means that there is no certainty of monthly mortgage repayment amounts and you may also pay more interest per month compared to other mortgage products that are on offer.

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See also:
Flexible / Lifestyle Mortgages   |  Standard Variable Rate /125% mortgages