Mortgages come in a wide and confusing variety, but if you choose carefully you should be able to get a mortgage that suits you. You need to decide first on the type of loan you want, then think about which approach to repaying your loan is best for you.
This is a brief summary of the main types of loan available.
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- Variable rate: the standard mortgage product, and often the most expensive of the range available. Rates move up and down more or less in line with the Bank of England base rate, but at the lender’s discretion and at a level typically 1.75 per cent higher than base rate.
- Tracker rate: the rate is guaranteed to move in line with Bank base rate by a set amount and usually for a set period, although in some cases the guarantee is for the life of the mortgage.
- Discounted rate: you get a discount on the standard variable rate, or the tracker rate, for a set period. This is often set in steps, with the discount decreasing in stages over a year or more.
- Fixed rate: the rate you pay is fixed for a set period, typically between one and five years. Your monthly payments therefore stay the same during that period, regardless of what happens to interest rates.
- Capped rate: the rate cannot go above a specified upper limit, but will follow rates down if they fall.
- Cashback: you get a cash payment when the loan is finalised, generally as a percentage of the loan amount, eg. 3 per cent. You usually have to pay the standard variable rate for a fixed period, or pay back some of the cash if you want to get out of the deal early.
- CAT standard: the loan meets standards laid down by the government for costs, access and terms. These ensure that you pay a fair rate of interest and there are no hidden charges or unfair terms in the small print.
- Flexible: this is really a repayment option rather than a type of loan. It helps you to pay off your mortgage earlier and cut your interest costs.
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