Guide to the different types of mortgages
When you’re looking to buy a home and start to look at mortgages, you’ll notice there are many different types available to you. The choice you make will ultimately be based on your individual situation, and the one you choose will determine your monthly mortgage payments. See below for the available options and choose the best option for you.
What are the different types of mortgages?
- Fixed-rate mortgages
- Standard variable rate mortgages (SVR)
- Tracker mortgages
- Discount rate mortgages
- Capped rate mortgages
Fixed-rate mortgages
A fixed-rate mortgage has a set interest rate for a set period, typically two to five years. This can be a good option for many buyers if they’ve secured a good rate, as it guarantees that your price isn’t going to change for a fixed amount of time, and it won’t go up and down with the Bank of England base rates. This provides buyers with peace of mind and makes it easier to budget more effectively by knowing the exact monthly mortgage payment. The only disadvantage of choosing this type of mortgage is that if interest rates fall, you won’t benefit and may end up paying more overall until your fixed-rate ends.
Tracker mortgages
A tracker mortgage is based on the Bank of England’s base rate, meaning that the interest you pay could change over time, as opposed to a fixed-rate mortgage that remains the same for the time agreed. This can be a good option, as you will benefit if base rates fall, but keep in mind that your monthly payments will also increase if interest rates rise. This can be a good option for homeowners who don’t have a lot left to pay on their house, as there is no early repayment charge if you decide to pay the remainder of your mortgage off.
Standard variable rate mortgages
Standard variable rate mortgages tend to follow the Bank of England’s base rate, and this option can mean that the lender has the right to set whatever level they choose, making them more likely to fluctuate than tracker mortgages. This can be a disadvantage; however, with this type of mortgage, you are not locked into a contract and are free to move to a different lender at any time if you find a more competitive deal elsewhere.
Discount rate mortgages
Discount rate mortgages use an initial interest rate set below the Standard variable rate for a specific period, resulting in lower interest payments and lower overall monthly mortgage payments for the first 2-5 years. Once this period is over, the rate will automatically change to the lender’s standard variable rate, at which point you can then switch to a more competitive deal. This can be a great option, but discounted rates may still fluctuate if standard rates change, as the discount is based on those rates.
Capped-rate mortgages
Capped-rate mortgages are similar to standard variable rate mortgages in that they use a variable rate that can change over time. The difference with a capped-rate is that although rates can vary, this type of mortgage will have a capped interest rate, meaning that monthly payments won’t rise above a certain level for an agreed amount of time, typically 2-5 years. This is a good option if the capped rate is within your budget, as it is the maximum you will pay, and it may be lower than this, resulting in lower monthly payments.
Specialist types of mortgages
- 95% mortgages
- Lifetime mortgage
- Guarantor
95% mortgages
This is where you will take out a mortgage for 95% of your new home’s value, leaving only a small 5% deposit to pay upfront, as opposed to the standard 10%. This is designed to make homeownership more affordable for both first-time and repeat buyers.
Read our full guide to 5% deposit mortgages to find out more.
Lifetime mortgages
Lifetime mortgages are available to homeowners aged 55 and over and are long-term loans secured against a property, providing access to some of the money tied up in it, tax-free. You don’t have to make monthly repayments like you would with a standard mortgage; interest builds up each year based on the total amount borrowed, which is usually repaid from the sale of your home when you pass away or move into long-term care. You can, however, choose to make monthly repayments if you wish, which will lower the amount owed when your home is sold.
Guarantor mortgages
This is a specialist mortgage type ideal for first-time buyers or those with low income or poor credit to get onto the property ladder. This is possible with a guarantor (a third party) on the mortgage, who would become liable for the debt if the homeowners are unable to pay. This will usually be a close family member or friend who has a good credit score and a stable income. They won’t own a share of the property or be named on the deeds, but they will be legally liable for the loan.
You’re ready to choose the type of mortgage that works for you
Now that you’ve got the information you need about all the different types of mortgages available to you, you’re better informed to make a choice that works for you. If you’re still unsure and feel you need some more information to make your decision, read our handy guide on mortgage rates. If you want to know about mortgages as a first-time buyer, read our first-time buyer mortgage guide. And if you’re now in a position to start house shopping and you’re looking for houses for sale in South Staffordshire, be sure to discover our thriving Wrottesley Village development.
