Types of Mortgages

Incentives Offered with Mortgages

Mortgages come in all shapes and sizes, and from time to time, lenders offer borrowers a range of added extras.

A Free Valuation

Some lenders offer a fee-free standard valuation carried out by their chosen surveyor as part of their mortgage deal. These deals are often available both to purchasers and those remortgaging their property.

As an alternative to free valuations, some lenders will charge the valuation fee upfront, but will then refund the fee in full on completion.

Cashback

This type of mortgage arrangement means that you receive a cash sum once your purchase has been completed and your mortgage is in place. This incentive sometimes requires the borrower to have a current or savings account with the lender. The amount you receive is normally expressed as a percentage of the amount you have borrowed and is designed to help out with costs associated with moving to a new house.

Free conveyancing

The lender will choose the conveyancer on your behalf and pay the basic legal fee to those who are remortgaging their existing property. This incentive can also be offered.

Fixed Rate Mortgages

These are the most common types of mortgage. According to Which?, six out of 10 mortgage customers have a fixed-rate deal.

With this type of mortgage you pay the same interest rate for the entire deal, regardless of interest rate changes elsewhere.

The two most common lengths of deal are two and five years. In most cases you’ll be moved on to your lender’s standard variable rate when you reach the end of your fixed term. Most lenders will offer a follow-on fixed rate and your mortgage adviser can help you with this nearer the time.

Whether a fixed-rate or variable-rate deal is right for your circumstances will depend on a few factors. The most important things to consider are:

a) Whether you think your income will change
b) Whether you want to know exactly how much you’ll pay each month
c) Whether you could cope if your monthly payments went up

Off Set Mortgages

An offset mortgage is where you have savings and a mortgage with the same lender and your cash savings are used to reduce the amount of mortgage interest you are charged. Rather than placing your money in a standard savings account, you place it in an offset account linked to your mortgage.

The bank offsets the total balances of your linked accounts against the amount you owe on the mortgage each month, and then works out your mortgage interest on the lowered balance. When you have an offset mortgage, you don’t receive interest on the linked accounts.

If you had a mortgage balance of £100,000 and offset £20,000 in savings, you will only be charged interest on £80,000. See our offset guide for more info.

Variable Rate Mortgages

We mentioned standard variable rates earlier. Each lender can set this figure at whatever level it wants, and it bears no relationship to the Bank of England base rate.

Although they normally don’t change often, lenders can change their standard variable rate at any time. Certain factors influence these changes – for example, they are more likely to change if there are rumours of the Bank of England changing the base rate in the near future.

Most people who have a standard variable mortgage have had their mortgages for over five years. However, your mortgage adviser should keep in touch at least once a year to ensure that you are getting the best mortgage rate for your personal circumstances.

Discount Mortgages

With this type of mortgage, you pay your lender’s standard variable rate, with a fixed amount discounted. In case you didn’t know, the term ‘standard variable rate’ refers to a rate chosen by your lender that doesn’t change very often, with a fixed amount discounted. More about these later in this guide.

If your lender’s standard rate was 4% and your mortgage came with a 1% discount, you’d pay 3%.

Sometimes discounted deals are ‘stepped’. This would mean that you might take out a five-year deal and pay a lower rate for a year and then a higher rate for the final four years.

Tracker Mortgages

This kind of mortgage tracks the Bank of England’s base rate. For instance, if the base rate was 0.1% and the additional rate 3%, you’d pay 3.1%.

Typically, you take out this kind of mortgage as an introductory deal period – for instance, for the first two years – before being moved on to your lender’s standard rate.

There are a few mortgages with ‘lifetime’ trackers, but these are uncommon. In this case, your rate will track the Bank of England base rate for the whole mortgage term.

Approximately one in 10 mortgage customers have a tracker mortgage according to research by Which?

Collars and Caps

What do jumpers and variable rates have in common? Well, they have a ‘collar’. This ‘collar’ refers to a rate below which they can’t fall, while others may be capped at a rate they can’t go above. It’s important that you pay attention to these features when choosing your deal. Not all variable rate deals have a collar.

Collars and caps apply to tracker mortgages as well as variable rate mortgages.