| Which mortgage should you
choose?
When considering what kind of mortgage you want, you
will want to consider the deals on offer and their advantages.
Mortgages usually offer one or more of a number of ‘core’
features, listed below:
• Standard variable rate
(SVR)
Most borrowers are transferred to their lender’s
SVR once their initial,
promotional rate period comes to an end. This is usually
the most expensive of their lender’s rates, and
the rate from which many people choose to switch to
a new product elsewhere.
• Fixed Rate
A fixed rate loan charges a set rate of interest for
a predetermined period, and then usually reverts to
the lender’s SVR. This kind of loan offers you
the security of knowing how much you’ll be repaying
during the initial period, and can make budgeting much
easier. But repayments may prove more expensive than
a discount rate initially, and may also become uncompetitive
later on, depending on how interest rates move over
the period of the fixed rate.
• Capped rate
A capped rate product offers similar security to a fixed
rate – since the rate you pay during the capped
period won’t exceed the capped rate – as
well as the chance to benefit from any fall in mortgage
rates within the capped period. However, the benefits
of capped rate mortgages usually come at a price: rates
are often higher than on lenders’ comparable fixed
products, and the initial term seldom lasts longer than
two or three years.
• Discount rate
A discount mortgage offers a reduction of a given amount
on the lender’s SVR and if this rate changes,
the rate you pay will fluctuate in line with it. Usually,
the shorter the discount period is, the greater the
discount. After the discount finishes, the loan reverts
in most cases to the lender’s SVR.
• Tracker
Trackers give borrowers the certainty of knowing the
rate they pay will move
automatically in line with Bank Base Rates. This allows
the borrower to benefit straight away from any cuts
in these rates, even if, as is often the case, the lender
delays reducing its SVR to reflect the reduction. Many
trackers also offer flexible terms.
• Cashback
A cashback mortgage pays an upfront lump sum, thereby
allowing a borrower to pay for, say, home furnishings
or to repay credit card debts, or to put down a deposit.
The rate paid is most often the lender’s SVR.
• Droplock
A droplock mortgage is a discount or tracker mortgage
which has an option to switch to a fixed rate at any
point within the initial period without paying early
repayment charges (also known as ‘redemption penalties’).
This provides an ideal way to benefit from base rates
when they’re low, with the option to switch easily
to the protection of a fixed rate should interest rates
then look set to rise significantly.
Additional features
In addition to the core features listed above, mortgages
can offer one or more additional features, such as:
• Flexible
A flexible mortgage allows you to vary your monthly
repayments to reflect your changing financial circumstances.
Depending on the flexibility of the product, you can,
without penalty:
- over- or under-pay, and/or
- repay lump sums, and/or
- take a payment 'holiday' to allow you to fund a
large expense, such as a wedding or new car.
Payment holidays and underpayments are, of course,
conditional – usually on the borrower adhering
to, or exceeding, a predetermined repayment schedule.
And many deals, even if not fully flexible, still offer
the ability simply to overpay.
• Current account
With a current account mortgage, your current account
and mortgage are
effectively merged, and your salary can be paid into
your mortgage account.
Interest is calculated on a daily basis, and when you
pay money into your account the overall loan size is
lowered, thereby reducing the amount of interest paid.
• Offset
Like current account mortgages, offset products allow
you to offset the balance of your mortgage against any
funds in a savings and/or current account held with
the same lender, and pay interest (calculated on a daily
basis) on the net balance between the accounts.
|
