In this week's millennial money episode, I ask financial expert Damien Fahy about the different types of mortgages.
A mortgage is a loan used to buy a property. So if you're like most people and don't have a spare £200,000 to buy a house, then you're going to need to borrow the money. A bank or building society will lend you the money once they are happy that you can afford the repayments and that you have a sufficient deposit. The mortgage will normally be a percentage of the property price, and the loan is secured against the property.
What is a tracker mortgage?
A tracker mortgage is a mortgage where the interest you pay on the loan tracks the Bank of England base rate. (The Bank of England base rate is the rate that you hear about in the news when there is talk of interest rates going up and down.) With a tracker mortgage the interest rate you pay is the Bank of England base rate plus a markup fee added on by the mortgage company. Some tracker mortgages have a collar - this means the interest rate cannot drop below a certain amount.
An example: If you have a £180,000 mortgage on a £200,000 property, then you will pay interest on the £180,000. The amount you pay is likely to change in line with the Bank of England base rate, and this can go up or down.
What is a fixed-rate mortgage?
As the name suggests, a fixed-rate mortgage is when the interest rate is fixed for a period of time. You get to pick the term that it is fixed for, usually over a 2, 5 or 10 year period. The rate is fixed at a set level and is guaranteed not to change during the fixed period. The mortgage company cannot change the rate, even if interest rates have risen. Therefore with a fixed-rate mortgage, you know exactly how much you will pay each month until the term ends.
What is a discount mortgage?
A discount mortgage is where you get a reduced rate at the beginning of your mortgage term for a period of time, e.g. two years, and then after that period you will be moved onto the lender's Standard Variable Rate (SVR). The Standard Variable Rate is the default rate that the lender charges all customers who are not tied into a fixed rate.
With a discount mortgage the lender can change their SVR at any time, so you will still receive the discount, but it is normally a percentage of the SVR. Therefore, your monthly mortgage repayment is likely to change.
What is an offset mortgage?
If you have a savings account and a mortgage with the same provider you may be able to offset your savings against your mortgage. This means that you will stop receiving interest on the savings that you have, but instead pay a reduced amount of interest on your mortgage.
An example: if you have a £200,000 mortgage and £20,000 in savings, you may only have to pay interest on £180,000 of the mortgage.
What is a standard variable mortgage
A standard variable mortgage is the lender's default mortgage and you will be paying the standard variable rate. This is the mortgage that you end up on once your existing mortgage term has come to an end. The standard variable mortgage rate is set by the lender and can often mean that your interest rate will increase, sometimes as much as 2% to 3%. Most people avoid being on a standard variable mortgage by remortgaging when their mortgage comes to the end of its term. If you are at the end of your mortgage deal a mortgage broker can help you to find the best deal on the market.
For more information on remortgaging take a look at these articles:
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