Mortage Rate Types

Last updated on 25/05/2017

Types of MortgageTypes of Mortgage

Other FAQs:

When you have decided on the Type of mortgage you need and whether you intend for it to be repaid on an interest only basis or a capital and interest repayment basis, you still have another choice to make.

That choice relates to the Type of mortgage scheme to choose.

Many mortgage lenders offer different types of mortgage scheme for you to choose from, but they will all offer mortgages linked to their Standard Variable Rate. 

The additional schemes that they offer will be related to the Standard Variable Rate either by fixing rates or discounting rates or tracking rates.

1. Standard Variable Mortgage

This is the interest rate charged by the mortgage lender to you for borrowing money.  The market for mortgages is highly competitive and these rates tend to only vary slightly between lenders.

The Standard Variable Mortgage Rate is set depending on a number of economic factors but mainly relies on interest rates available in the market.

Standard Variable Mortgage rates tend to change when economic factors change and if your mortgage interest is calculated on this rate, the amount of interest you pay will change when the variable rate changes.

Over the years the Bank of England base rate has reduced dramatically and so have interest rates for borrowing.  If you are an existing borrower on a Standard Variable Mortgage Rate you will have seen your mortgage interest payments reduce because a lower rate of interest is charged.

If interest rates in the market start to rise, so will your interest payments.

Due to the many different types of rate available for calculating your mortgage payments, being subject to a Standard Variable Mortgage Rate only may put you at a disadvantage and mean that you pay more than you should be.

If you are subject to a Standard Variable Rate mortgage and want to find out if you could get a more competitive mortgage, contact us for advice or fill out our mortgage search form.

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2. Cap and Collar Mortgage

Cap and Collar Mortgage interest rates generally provide you with maximum and minimum interest rates to be charged over a set period of time.  Some mortgage lenders may just offer a capped rate and others may just offer a collar rate.

A capped rate is the maximum interest rate you will pay.

A collared rate is the minimum interest rate you will pay.

By opting for a capped and collared interest rate mortgage you will know the maximum and minimum amounts of interest that can be charged by the mortgage lender.  If interest rates were to rise generally then it could mean you paying the capped rate.  However, if interest rates were to fall generally, it could mean you paying the collared rate.  Obviously, if interest movements are only slight, it could mean that you are paying an interest rate in between the capped and collared rates.

Once the period for the capped and collared rate has ended you will generally be charged interest based on the lender's current Standard Variable Rate.

With many capped and collared mortgage rates you are 'tied' into them.  This means that if you want to move away from the rate, for example if interest rates have fallen overall and your collared rate is higher than the Standard Variable Rate, you will be charged a fee or penalty to move to a different rate.

Once your capped and collared mortgage rate has finished it is typical for any penalties to also have finished.  This then gives you a number of choices:

  • Remain with your mortgage lender and pay interest in line with their Standard Variable Rate.
  • Remain with your mortgage lender and move onto another capped and collared or different interest rate.
  • Re-mortgage with another mortgage lender to take advantage of their capped and collared or different interest rates.

With the range of mortgage deals and special rates available, remaining on a Standard Variable Rate could mean you are paying too much interest on your borrowing.

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3. Cash Back Mortgage

Mortgage lenders tend to offer cash back mortgage deals as an incentive for people to borrow from them.

This can be the case as an example for first time buyers where finances are tight.  They would receive a lump sum of money on completion of the cash back mortgage.

The levels of cash back mortgage available vary from lender to lender and they are usually expressed as a percentage of the loan you take.

Cash back mortgage deals do also vary depending on the percentage of loan you take compared to the value of the property you purchase.  For example, if you borrow 75% of the property value your cash back is likely to be a lower percentage than if you borrowed 70% of the property value.

Many cash back mortgages also carry penalties if you pay off or transfer your mortgage to another lender.  The penalties are likely to be the value of the whole cash back or a certain percentage of it.

Cash back mortgages may look good value for money but as we all know there is no such thing as 'a free lunch'.  Mortgage lenders are likely to charge higher rates of interest over the lifetime of the mortgage and this may not be beneficial.

However, if the cash back mortgage deal only has penalties for a short period and you intend to re-mortgage afterwards, they can be beneficial.

Always read the small print and make sure you will not be worse off by taking a cash back mortgage.

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4. Discount Mortgage

As an incentive to borrowers many mortgage lenders offer a discount mortgage interest rate.  This is generally a discount from their Standard Variable Rate and will be available for a set period of time.

By opting for a discount mortgage interest rate your mortgage repayments will still vary in line with interest rate movements but the amount you are charged will be less than if you had been on the Standard Variable Rate.

Once the discount mortgage rate period has ended you will generally be charged interest based on the lender's current Standard Variable Rate.

With many discounted rates you are 'tied' into that rate.  This means that if you want to move away from the rate onto a different one, you will be charged a fee or penalty to move to a different rate.

Once your discount mortgage rate has finished it is typical for any penalties to also have finished.  This then gives you a number of choices:

  • Remain with your mortgage lender and pay interest in line with their Standard Variable Rate.
  • Remain with your mortgage lender and move onto another discounted or different interest rate.
  • Re-mortgage with another mortgage lender to take advantage of their discounted or different interest rates.

With the range of discount mortgage deals and special rates available, remaining on a Standard Variable Rate could mean you are paying too much interest on your borrowing.

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5. Fixed Rate MortgageFixed Rate Mortgage

If you are offered a fixed rate mortgage, interest rate it will usually be at a lower level than the mortgage lender's Standard Variable Rate and will only apply for a short time.  This could be 1, 2, 3 or 5 years.

By opting for a fixed rate mortgage, your mortgage repayments will stay at the same level for the duration of the fixed rate.

Once the fixed rate mortgage has ended you will generally be charged interest based on the lender's current Standard Variable Rate.

It is possible to obtain fixed rates over a longer period but with many fixed rates you are 'tied' into that rate.  This means that if you want to move away from the rate, for example if interest rates have fallen overall and your fixed rate is higher than the Standard Variable Rate, you will be charged a fee or penalty to move to a different rate.

Once your fixed mortgage rate has finished it is typical for any penalties to also have finished.  This then gives you a number of choices:

  • Remain with your mortgage lender and pay interest in line with their Standard Variable Rate.
  • Remain with your mortgage lender and move onto another fixed or different interest rate.
  • Re-mortgage with another mortgage lender to take advantage of their fixed or different interest rates.

With the range of mortgage deals and special rates available, remaining on a Standard Variable Rate could mean you are paying too much interest on your borrowing.

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6. Flexible Mortgage

With interest rates being low, It is often tempting to go for that larger mortgage as you can borrow cheaply.  Likewise, the interest rates received on your savings are also not going to be that good. 

One of the main questions to be asked in today's financial world is how people can make their money work harder for them as well as saving money on mortgage payments.

Recently there has been a rise in the availability of new style flexible mortgage and savings linked accounts. 

By planning carefully it is possible to save large amounts on mortgage payments, reduce the term of your mortgage and get equivalent higher rates of return in low risk cash deposit based savings accounts.  In terms of the returns it is sometimes possible to more than double the current Bank of England base rate!

Example Of A Flexible - Offset Mortgage:

A client obtains a £100,000 mortgage over 25 years at a rate of 4.85% per annum. 

The monthly payments on a capital and interest repayment mortgage basis are £576 per month. 

The clients also had additional savings of £47,000 in cash deposit accounts. 

In advising the clients, we suggested that they have a flexible mortgage and savings linked account with a major well known bank.  These special accounts work when your savings are invested with the same bank and are offset against the amount that you have on your flexible mortgage.  In simple terms these clients opened two 'jam jars'

How do the 'jam jars' work?

Jam jar 1 - The mortgage - The clients had a mortgage of £100,000 that would be repaid over 25 years.  The monthly mortgage payment was £576 per month.

Jam jar 2 - The savings account £47,000 was invested in a deposit account that received no interest. Yes, That is right, no interest.

Offsetting saves money

The amount owed in jam jar 1 was offset by the amount in savings in jam jar 2.  This means that the clients were only really in debt by £53,000.  This means that the amount really due on their flexible mortgage is just £305 per month.  However, they actually still pay £576 per month.  The extra amount that they pay is technically reducing the flexible mortgage amount and therefore the term of the mortgage.

Access to savings

If the clients wished to take out some or all of their savings at any time they can.  They have complete access to all their savings accounts at any time.  Their mortgage payments remain the same, it is just that less will be allocated to their savings pot to reduce the term of their flexible mortgage.  This is because they technically owe more to the bank as the mortgage interest element will increase the less they have on deposit in savings.

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7. Pensions Control - Using Pension Funds to Buy Property

Did you know that:

  • Your pension fund can own commercial property?
  • Your pension fund can, in part, own some residential property element?
  • Your pension fund can have a mortgage?
  • Your pension fund can lend money?
  • Your pension fund can buy shares in your company?

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8. Pension and ISA MortgageProtect From Rises With Low Rates

In addition to traditional methods such as capital and interest/repayment mortgages and the more risky investment linked mortgages, you can also operate other investment linked interest only mortgages such as Pension and ISA mortgages.

Much in the same way as endowment linked mortgages, these other pension and ISA mortgages rely on the performance and release of capital to repay the mortgage at the end of the term.

Individual Savings Accounts - ISAs

ISAs are used as the savings plan to save up a sum of money for release at a given date.

Pension Mortgages

Pension Mortgages are used by saving in a pension until the given retirement date and then releasing the tax free cash lump sum to repay the debt.

High Risk

In our opinion, the above mortgage repayment types and indeed other savings routes to pay off a mortgage debt are a medium to higher risk strategy and should only be used if you are fully aware of the risks. 

Mortgage Rate Planning

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