Choosing what type of mortgage you want is when the process can appear to get confusing. mform aim to simplify this for you and below is a description of the various types of mortgage.
- Standard Variable Rate (SVR)
- Discount Rate
- Tracker Rate
- Fixed Rate
- Capped Rate
- Current Account Mortgage (CAM)
- Offset Mortgage
- Buy to Let
Standard Variable Rate (SVR)
All lenders have a standard variable rate (SVR) which is variable and fluctuates with any changes in Bank of England base rate. Although it is not directly linked to the Bank of England base rate lenders will generally adjust their SVR in response to any changes in base rate. Most mortgages with special terms revert to the SVR after the period of the special term expires.
Discount Rate
A discount rate mortgage is a variable rate mortgage which offers a discount from the lenders standard variable rate. The lower discounted rate increases or decreases in line with any changes in the lenders standard variable rate. At the end of the discounted period you will revert to the lenders standard variable rate.
Tracker Rate
A tracker rate mortgage is another type of variable rate mortgage however the interest rate is linked to the Bank of England base rate rather than the lenders standard variable rate. The lender will charge the borrower a percentage, for example 0.5%, on top of the base rate. This rate can apply for a certain period or for the term of the mortgage.
Fixed Rate
A fixed rate mortgage fixes your interest rate for a period of time, meaning your monthly payment won't change. This period can be as short as 1 year or as long as 25 years. If you are a first time buyer you may like the idea of a fixed rate product, as having fixed monthly payments will make it easier for you to budget. At the end of the fixed rate the mortgage will revert to the lenders standard variable rate which is often higher than the fixed rate.
Capped Rate
A capped rate mortgage is a variable rate mortgage with a maximum interest rate for a specific period. The interest rate cannot rise above the pre agreed capped rate during the specified period. If the lenders interest rates fall below the capped rate the borrower will benefit from any reduction. Capped rates may also have a 'collar' which means the rate can not fall below this level.
Current Account Mortgage (CAM)
A current account mortgage (CAM), is a variable rate mortgage which is linked to your bank account. The interest is calculated daily and any money in your bank account can be offset against the outstanding mortgage balance. This can be used to reduce your monthly payments or reduce the term of the loan. CAM's calculate interest on a daily basis and offer a lot of flexibility. They are often suitable for people with fluctuating incomes. They can be particularly tax efficient for higher rate taxpayers.
Offset Mortgage
An offset mortgage is similar to a CAM however it often uses a savings account balance as well as your current account balance. Any savings accumulated in the savings account and your current account can be offset against the outstanding mortgage balance. This will have the effect of reducing the interest charged on your mortgage which can either reduce your monthly payment or reduce the term of the mortgage.
Buy to Let
A buy to let mortgage is a mortgage given on a property which is rented out, rather than being used as the mortgage holder’s main residence. Please read our buy to let guide here.
All of the mortgage types above are available over a varying number of years, from as short as one year to the full term of the mortgage which is usually twenty five years. When using mform's service you are free to search for mortgages over all time periods. It is important to consider your personal circumstances and plan ahead in choosing how long you want any special interest rate on your mortgage to apply for.
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