Fixed rate mortgages are ideal for those who like to know how much they are paying each month. The advantage of a fixed rate mortgage is that if interest rates go up you won’t see any increase in your monthly repayments. At the end of the two- to five-year term borrowers will typically be converted to the standard variable rate.
With a variable rate mortgage you’ll pay the lender’s standard variable rate of interest (SVR). This is linked to market conditions, which means that if the Bank of England puts the interest rate up – it’s likely your SVR will also go up and vice versa.
You could end up saving money on your mortgage if interest rates drop because your payments will follow suit. But bare in mind, if rates go up so will your repayments. Take this into account when calculating your budget.
Discount rate mortgages have the interest rate set below the SVR for a limited time period. For example, if you have a one per cent discount and the SVR is five per cent, your rate would be four per cent. Then if the SVR rose to six per cent yours would rise to five per cent.
As with the variable rate, you could benefit from lower payments but the rate could go up instead. Also bare in mind that at the end of your discounted term your mortgage repayments will increase back to the standard rate.
A cashback mortgage will give you a cash lump sum once you’ve completed on your purchase. This can be either a set amount of money or a percentage of the amount you have borrowed. However, if you repay the mortgage in full within a given time (three to five years) then the cashback must be repaid.
Flexible mortgages allow you to alter your repayments to suit your situation. If some months you feel you’d like to pay a little extra, you can. Also, if you decide that you would like to pay less or take a break for a period – you can do that too. Most flexible mortgages charge interest on a daily or monthly rate which means if you can pay more than the set repayment, on a regular basis, you could reduce the term of your mortgage and save money.
Capped rate mortgages are basically a mixture of the fixed rate and discount rate mortgage. A maximum interest rate (the cap) is agreed for a set period of time but if the SVR drops below that rate you’ll pay that lower amount. Some capped mortgages will have a ‘floor’ as well as a ‘ceiling’ between which the rate payable may move.
Current account mortgages combine your mortgage with your current account, so in effect you have a very large overdraft. The advantage is that when your interest is calculated on the sum you borrowed, the funds you have in your current account are taken off the loan.
So if you borrow £100,000 and you have £3,000 in your account you’ll only be charged interest on £97,000. You could end up paying off your mortgage quicker.
With offset mortgages the funds you have in savings or current accounts are taken into consideration when the interest on your mortgage is calculated. This could be an advantage as with the current account mortgage and all your accounts are in one place which may make them easier to manage, but it’s really only worth considering an offset mortgage if you generally have a healthy amount of credit in your other accounts.
At Keystone we understand the importance of finding the right mortgage, so our associated expert team of mortgage consultants are on hand to help you every step of the way.
We are proud to offer you independent mortgage advice, which means we work for you and can advise you on the most suitable mortgage for your needs, from the thousands of different mortgage schemes we have available.
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