Posted on: March 21, 2023
An Overview of The Mortgage Product Types
11-07-2023 Correct at time of publication, but subject to change.
The choice of lender and products for mortgages can be mind boggling, but your mortgage adviser will help you identify the most appropriate lender. And whilst there are thousands of products they all fall into two main groups as follows.
Fixed rates
These products set your monthly payments for a specific amount of time, typically 2, 3, 5 or 10 years and possibly longer.
Advantages are that they allow you to budget for a certain amount of time meaning you won’t need to worry about your payments changing during the fixed period.
The main disadvantage is that typically these products carry penalty if you repay the loan during the fixed period. But subject to lenders agreement in most cases you can move the mortgage from one property to another if you move and this will avoid the penalty being charged.
If you want to overpay your mortgage to reduce the balance more quickly the lender will generally allow you to overpay up to 10% of the outstanding capital in any one year without penalty.
Variable or tracker rates
As the name suggest these rates move up and down with prevailing interest rates. They provide less security than fixed rates, but can provide more flexibility as they can be provided with out early repayment charges. Variable/ tracker rates sometimes has a floor rate below which the charge rate cannot drop.
They can do this on one of 3 ways:
- Tracker rates. Lenders set the rate against the Bank of England base rate plus or minus a set percentage for a set period of time. The lender does not then have control over setting the rate
- Discounted variable rate. This is a discount off the lenders standard variable rate. Whilst the lenders standard variable rate is set by the lender it generally follows movements in the Bank of England base rate, but it won’t necessarily mirror the movements. With this product the lender has control over what level they set the variable rate at. Also when and how often they set it.
- Standard variable rate. This is just the discounted variable rate without the discount. Once any fixed, tracker or discounted period finishes a borrower will revert to variable rate if they don’t seek another product.
They can be lower or higher than fixed rates depending on market conditions and the view of lenders in terms of expected future interest rate movements.
Other facilities attaching to fixed or tracker products
Whilst there are two main types of product there are other options that can be offered by lenders. Your mortgage adviser will be able to recommend the best combination of options for your circumstances.
Offset
This is a facility where a lender allows you to offset any savings you have against the mortgage interest charged. For example if you had a mortgage balance of £200,000 and savings of £20,000 your lender would only charge you interest on the net balance of £180,000, but you wouldn’t receive interest on your savings deposit. They are available on both fixed and variable rates. This is considered a sophisticated product but your mortgage adviser can discuss whether it might be appropriate for you.
Cashback
This is a way of lenders offering incentives. The cashback is payable on completion. Cashback can be as little as £150 but can be more substantial. For higher levels of cashback the lender may charge a higher rate.
Free valuation
Some lenders will offer an incentive of a free basic valuation. Please see our First time buyer guide for information on the different types of survey available to you.
Sub prime
Where a borrower has adverse credit, arrears or just a poor credit score there are lenders in the market place that can still offer both fixed, or variable rates but with a rating to reflect the lower credit score and the associated risk. Interest rates vary depending on credit history and credit score.
Repayment methods
There are two ways you can agree to repay the capital owed whatever product you may choose.
Capital repayment
With this method your monthly payment is made up of interest and a capital element to reduce the mortgage balance. If you maintain monthly payments then your mortgage will gradually reduce to zero over the allotted term. Being the safer of the two options it is by far the most popular method for most borrowers.
Interest only
Borrowers maintain interest payments only meaning the balance does not reduce. Interest only payments are cheaper than the equivalent Capital repayment mortgage as they don’t contain a contribution to reduce the capital on a monthly basis. Instead the borrower uses an investment vehicle to repay the debt at the end of the term, or simply they down size if they have sufficient equity or just sell the property. Interest only is less popular than capital repayment because of the inherent risk that capital may not be available at the end of the term and thus a borrower may be forced to sell the property. Choices for interest only are considerably less than for repayment (2) as not all lenders offer this type of repayment method and if they do there might be conditions and criteria attached.
(1) & (2) Source Trigold mortgage sourcing system 07/03/2023
