Nowadays there are many different types of mortgage
available offering various financial incentives to
the potential borrower. They can be obtained from
a variety of sources such as banks, building societies,
and other lenders, or via an intermediary. Some intermediaries
offer products from a restricted range of lenders,
while others are truly independent and offer products
from the whole market place.
Nowadays there are several different types of mortgage
available, each of which has specific features and
incentives to consider.
Variable Rate Mortgage
Most lenders have a set rate of interest known as
the standard variable rate (SVR). This is usually
the rate that is charged to existing borrowers after
any product benefit (e.g. discount or fixed rate)
has expired. The rate usually varies in relation to
the increases and decreases imposed by the Bank of
England on interest rates.
New borrowers would rarely need to take out a mortgage
at the standard variable rate.
The attraction of a fixed rate mortgage is that the
monthly costs will remain the same throughout the
period of the fixed rate. This usually enables borrowers
to plan their budgets well into the future and benefit
from protection against a sharp rise in interest rate.
On the other hand borrowers could lose out if interest
rates generally fall during the fixed period.
Lenders often offer discount incentives on their standard
variable rate for a given period of time. In effect
borrowers have a variable rate mortgage but it will
remain at an agreed margin below the lender’s standard
variable rate during the agreed discount term.
a capped rate mortgage rate the rate you pay is guaranteed
not to rise above the pre-set ceiling for an agreed
period of time. If the lender's standard rate is below
the pre-set ceiling, the rate you pay is the standard
variable rate; otherwise you will pay at the ceiling
rate. So as with rate mortgage, the borrower is protected
from rises in prevailing interest rates but will not
lose out if interest rates fall.
Flexible Mortgage (Sometimes called ‘Australian
Many lenders are now offering variable rate mortgages,
often below the standard variable rate, where the
borrower can choose to make overpayments, underpayments,
or take a payment holiday for an agreed period of
time. Making overpayments can significantly reduce
the cost or term of the mortgage. Some lenders even
allow borrowing against the equity in a property,
and will issue a chequebook for drawing funds.
This is a variable rate mortgage where the rate is
linked to the Bank of England base rate, usually for
a fixed period of the full term of the mortgage. These
are increasing in popularity, as the rate you pay
is often less than the standard variable rate.
In general terms there are two main methods of repaying
a mortgage, the repayment method (sometimes called
capital and interest), and the interest only method.
With this type of mortgage the monthly payment will
include both the lenders interest and an additional
amount, which will reduce the balance on the loan.
The lender to make sure nothing is owed by the end
of the agreed mortgage term will normally calculate
As the name suggests, each month the borrower simply
pays the interest charged by the lender. They do not
pay any capital so the loan outstanding does not reduce.
Instead, the borrower will usually put in place a
regular investment plan to run the same term as the
loan. Whilst endowment policies have to date been
the most common type of investment plan, these are
rapidly falling out of favour as many borrowers are
being advised there will be insufficient funds at
the end of the term to repay the loan. ISAs are becoming
the most popular investment vehicle, offering greater