Mortgage Types - Full Guide »
There are many different mortgage types, and whether you are a first time buyer getting their first mortgage or you are looking to remortgage your home or switch mortgage rates or lenders, it is important to compare a range of different mortgage types before making a final choice.
There are a number of different mortgage types, including:
- Fixed rate
The amount of interest you pay is fixed by the lender for a period of time. This is usually around three years, although you can get fixed rate deals for a year, 10 years or even for an entire mortgage term. Fixed rates are popular because you know exactly how much you are going to be paying each month, and for the term, your payments can not be affected by rises in the base rate.
- Variable
The interest rate set by the lender is determined by the Bank of England's base rate. It is set higher than the base rate – usually by about 2% - and as the base rate goes up and down, so do the mortgage repayments. You could end up paying very low rates if the base rate drops, but equally, you could get stung with big repayments if it rises.
- Capped Rate
These are designed to be the best of both worlds – they have the advantages of a variable rate, whereby if the base rate goes down, so do the repayments. They also have the benefits of a fixed rate, because there is a cap on the amount of interest you pay, and it cannot go above a certain number, even if the base rate does. Capped rate mortgages are quite rare, and usually have high set up costs.
- Discounted Rate
This is very much an introductory deal – the lender will offer a cheaper rate for a fixed period so that payments are relatively low at the start of the term to attract customers. The rate goes back to the ender's variable rate once the period is up.
Before making a decision, look carefully at all the different mortgage types and lenders, taking into account any setup fees that may apply.