Mortgage Guide

Mortgage Types

There are a number of alternative types of mortgage that can be available at any given time. The most common are:

A variable rate mortgage, where the amount of your monthly repayment is linked to the mortgage interest rate charged by your lender. If the mortgage rate is increased, the amount of your monthly repayment increases. Conversely, when the mortgage rate decreases, so does the amount of your monthly repayment. The change in your monthly payment is calculated to ensure that the mortgage loan is on course to be repaid within the agreed term. Many lenders put rates up faster than they come down!

A variation on this is a tracker mortgage. In this case your mortgage rate is guaranteed to follow the base rate by a specific percentage difference. However, lenders often reserve the right to vary the percentage difference if it is in their interests to do so.

An offset mortgage allows the mortgage lender to take into account your savings when calculating how much you owe each month. You have to forgo any interest you would have earned on your savings, because they are used to reduce your mortgage debt each month. However, when (as now) savings rates are low (particularly after tax and inflation), it can be cost effective to use your savings in this way if you have substantial savings and are a higher rate taxpayer.

A current account mortgage (CAM) combines your mortgage, your current account, your savings account and even your personal loans and credit cards into one account. Your salary is paid into this account, something insisted upon by some lenders, and should you not spend all your income at the end of the month, that amount is taken off what you owe on your mortgage.

A fixed rate mortgage, where the interest rate charged is fixed at a certain level for a set period of time. Whilst during this period you would be protected from any increase in monthly payments, caused by an increase in variable mortgage rates, you would not benefit from any decrease in monthly payments, caused by a reduction in those rates. However, during the fixed rate period, you would know exactly how much your gross mortgage payments would be.

A capped rate mortgage is a variable rate mortgage, with a specified maximum interest rate that can be charged, for a set period. In other words, whilst your monthly payments can be affected by movements in the mortgage rate, you will know the maximum rate that could be charged during the set period and hence be protected from rates higher than the maximum limit. (A collared rate is a specified minimum rate; hence a capped and collared mortgage will be a variable rate mortgage, where the rate will be limited between a known minimum and maximum).

A discounted rate mortgage is a variable rate mortgage, which allows a known reduction in the mortgage rate charged for a set term. This differs from a deferred rate mortgage, where instead of allowing a discount in the rate charged, a reduced monthly payment is allowed, with the shortfall being added to the mortgage debt.

At the end of any fixed, capped or discounted rate period, your mortgage normally reverts to a variable rate. This may be higher than the rate you have been paying. In some cases, the lender may offer you an alternative rate. Please refer to your mortgage offer letter for details.

Some fixed, capped and discounted rate mortgages can be continued if you move house during the term of the offer rate. Please refer to your mortgage offer letter to see if this applies.

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