Six types of mortgages

As a homeowner, your mortgage will almost certainly be your largest ongoing expense for most of your life. Whether you are planning to buy your first home or you’re looking to reduce your costs, it makes sense to understand what’s available.

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Here is a look at six of the mortgage types on offer, and the pros and cons of each.

Standard variable rate (SVR)

Your lender’s SVR can be changed at any time. The rate usually follows changes in the Bank of England base rate, rising quickly if the base rate rises. Although you are carrying the risk of a rate rise, you will have the flexibility to overpay or move to another provider without penalty.

Discount

The lender discounts their SVR by a percentage for a fixed term, often two or three years. The cost will be lower than paying the SVR, but there will be a penalty for leaving before the end of the term.

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Tracker

Tracker mortgages are normally based on the Bank of England base rate, plus an additional percentage. They can be for a fixed term or run for the life of the mortgage.

Capped

The rate follows the lender’s SVR plus a percentage, but there is a ceiling, so you are protected if the rate rises steeply. It’s important to compare the rate and the cap.

Fixed rate

The interest rate is fixed for a set period, often two to five years. If interest rates rise, you will be protected from the increase, but your rate will be slightly higher than the variable rate, and there will be a penalty if you decide to leave early.

A fixed rate mortgage can offer some protection from the uncertainty around Brexit, as discussed by Money Saving Expert’s Martin Lewis.

Offset

If you have savings, an offset mortgage may be a good option. Your savings will be used to overpay your mortgage, reducing the term.

Shop around

It’s useful to get independent local advice. For example searching for conveyancing solicitors Guildford would return options such as https://www.samconveyancing.co.uk/conveyancing-solicitors/conveyancing-solicitors-Guildford.

As with all household expenses, it pays to keep track of the date when your deal ends, and shop around again. Also consider any fixed costs, such as an arrangement or legal fee. These will usually be bundled into the mortgage but you will still be paying them, including the interest.

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