Different Types Of Mortgage Products

Standard Variable rate mortgage – This kind of mortgage is linked to the Bank of England Base Rate. Although the interest rate in this type of mortgage increases and decrees in tune with the Bank of England Base Rate, the lenders are not obliged to decrease the standard variable rate even if there has been a decrease in the Bank of England Base Rate. This type of mortgage is not very popular today as better rates are accessible on products such as fixed, tracker and discount. However it is worth noting that when fixed, tracker and discount deals come to an end they relapse to the standard variable rate. So the onus is on the borrower to arrange a better deal since the standard variable mortgage rates are generally very high (usually 1% to 1.5% higher than the Bank of England Base Rate) which will mean higher monthly repayments.

Fixed rate mortgage – Lenders offer these rates to new borrowers and to borrowers looking to re-mortgage. The advantage of this type of mortgage is that the rates are fixed for the period on offer eg 2 years, 3 years, 5 years etc. The borrower knows how much he is accountable to pay for that period and so can budget accordingly. He / she is there protected against any interest rate increases. The downside is that if interest rates are to fall, then he / she will not be able to take advantage of lower interest rates due to the fact that he / she has opted for the fixed interest rate. If the borrower wants to change from a fixed rate to a mortgage product with a lower rate, he / she will find a clause in his / her mortgage contract that they will be subjected to an early repayment charge. The reason for this early repayment charge clause is to discourage the borrower from switching to another product with the same lender or to another lender. Early reimbursement charges will also apply if the borrower wants to part – repay his / her mortgage before the stipulated time. However, there are some lenders who do allow their borrowers to part- repay for an example, 10% of their capital outstanding each year without incurring early repayment charges. Do keep in mind too that once the fixed rate deal ends, the mortgage interest rate always reverts back to the lender's standard variable rate which is often higher than the fixed rate deal. Without the borrower taking steps to seek a better deal with another lender, he / she will end up with higher monthly repayments especially if interest rates have increased during the prevalence of his / her fixed rate deal.

Tracker rate mortgage – This variable rate mortgage tracks the Bank of England Base Rate over a set period characteristically 2 years, 3 years (or more) right up to ten years. The charged rate will be either a fixed percentage above the Bank of England Base Rate for the whole period or a fixed discount off the Bank of England Base Rate for a given period of time followed by a fixed percentage higher than the Bank of England Base Rate for the remaining term. The main benefit of this product is that there is a guarantee that the interest rate will be less following a decrease in the Bank of England Base Rate. This type of guarantee does not exist with standard variable mortgages. If the lender decides to reduce the interest rate on a standard variable mortgage even though there has been no reduction in the Bank of England Base Rate, the lender will not be obligated to lower the interest on the tracker mortgage. But as it is with the fixed rate mortgage, early repayment / part repayment charges will doly apply.

Discounted Rate Mortgage – This kind of mortgage offers a discount off the lender's standard variable rate mortgage for a given time say 2 years or more. Depending on the discount, the borrower always pays less than the lender's standard variable rate eg 1%. So the borrower will benefit if the common trend is towards reduction in interest rates. Unlike the tracker mortgage, the lender is not obligated to decrease interest rates even if the Bank of England Base Rate is declined. As it is with the other kinds of mortgages, early repayment / part reimbursement charges will apply in this type of mortgage as well.