What are the different types of mortgage?
When it comes to mortgage schemes, there are few different options to choose from, the way your interest rate is set and the way in which you pay off the debt are both things that can vary depending on what type of scheme you have, so here's an outline of the most common types of mortgages:
Standard Variable Rate
The standard variable rate or SVR is a banks basic mortgage rate, if you have a mortgage with a bank but your initial rate scheme expired, you are likely to be paying this rate. It's usually higher than most of their mortgage products like fixed rates and discounted rates and is also liable to change, a bank can change their SVR at any time but it's loosely based on the general level of mortgage rates and also the Bank of England's base rate.
Fixed rate refers to the interest rate of your mortgage loan, as the name suggests it involves a guaranteed rate of interest for a set period of team, commonly 2, 3, 5 and even 10 years. This can be a good option if you're looking for stability as it will guarantee your monthly payments for the course of the rate's term, then when that term is over you can just remortgage on to another fixed rate. Typically, some of the lowest rates on the market can be found in the 2 year fixed range.
A tracker rate is a form of variable rate, meaning the interest rate on your loan is dynamic and could change at any time, this type of rate gets its name because it tracks the level of another rate, commonly the Bank of England base rate. To use an example of this type of scheme, you could get a tracker rate mortgage at 2% above base rate, meaning if the Bank of England base rate was 0.5%, you would have a rate of 2.5% on your mortgage, the Bank of England could then decide to increase their base rate and your rate would increase by the same amount. Depending on market conditions this can provide you with a low interest rate, but it's always liable to change and won't offer you guaranteed monthly payments.
A discounted rate is another type of variable rate, it's usually set for a period of 2, 3 and 5 years at a time and tracks the movement of the lenders Standard Variable Rate. An example of this type of scheme could be 2% less than SVR, so you will receive an interest rate that is exactly 2% less than the bank's standard variable rate for the term of your scheme. Remember that the bank can change their SVR at any time and your interest rate will change in line with this.
A capped rate scheme is another type of variable rate, but one with a ceiling. It's liable to change similarly to the other schemes previously discussed, but you'll get the guarantee that your interest rate will never exceed a set threshold, so it offers a little more stability than other variable rates. These rates aren't very common at the moment due to the historically low interest rates available on the market.
Capital Repayment Mortgages
This refers to the way in which you pay off your debt over the course of your mortgage loan, this is a standard mortgage type and simply means that your monthly payment will be split between paying off both the interest associated with your loan as well as the original capital portion of the loan.
Interest Only Mortgages
With this type of mortgage, your monthly payment will not be put towards paying off the loan amount itself, only the interest charges associated with it. Monthly payments are lower as a result, but you will have to pay off the full capital portion of the loan at the end of your mortgage term, with this type of mortgage you must prove at application stage that you have an appropriate plan for paying off the bulk of the loan when the time comes.