Variable rate mortgage

This is the ‘traditional’ mortgage, where interest and capital Is repaid over the period of the loan. This type of mortgage has an interest rate payable that can rise and fall in line with market condition, which involves a degree of uncertainty as monthly repayments can vary.

Interest may be calculated yearly or on a daily basis and payments in the early years are mainly made up of interest, with the proportion of capital repaid increasing throughout the term.

Buy-to-let mortgage

This is normally a mortgage arranged on property that is intended to be let to other people and not occupied by the owner. There are also buy-to-let mortgages where only part of your home is let. Rates are generally higher than for ‘owner occupier’ mortgages.

Capped rate mortgage

Some mortgages can be arranged on a variable rate, but where the rate will not (for an agreed period) rise above a set level. They can, however move up and down below that level.

At the end of the capped period the loan will revert to the lender’s standard variable rate which means the customer’s monthly payments are likely to increase. A booking fee may be charged by the lender.

Cashback mortgage

Some mortgages offer customers a lump sum on completion of the mortgage, perhaps to meet legal and removal charges. The amounts involved can sometimes be quite substantial but there is usually a ‘tie-in’ period during which substantial penalties could apply if you repay the mortgage. A booking fee may be charged by the lender.

Discounted mortgage

Some mortgages offer a discount against the standard variable rate for a set period. This is not a fixed rate; the cost will simply be a set percentage lower than the normal variable rate. In many cases, a penalty will apply if you repay the mortgage, even if this is some time after the discounted period has ended.

This involves a degree of uncertainty as monthly repayments can vary. At the end of the discounted period the loan will revert to the lender’s standard variable rate which means the customer’s monthly payments are likely to increase. A booking fee may be charged by the lender.

Fixed rate mortgages

Fixed rate mortgages apply for a set period and ensure that borrowers know precisely how much their monthly outgoings are for that time, irrespective of how interest rates may change. You should be aware that, if interest rates generally fall below the rate being paid, the fixed rate continues to apply for the agreed period. At the end of the fixed rate period the loan will revert to the lender’s standard variable rate which means the customer’s monthly payments are likely to increase. A booking fee may be charged by the lender.

Offset mortgage

A new mortgage product (originating from Australia) allows those with savings to offset the interest due on their mortgage against interest they would have received on those savings held with the same bank or building society.

This is a slightly complex arrangement and normally only applies to those who have substantial savings, a good regular income (perhaps with occasional bonuses) and who may require greater than usual flexibility over repayments. They are generally only favoured by the more financially astute individual. A booking fee may be charged by the lender.

Re-mortgage

Some people may wish to alter their mortgage even though they are not moving, perhaps because they wish to try to secure a better interest rate, or in order to raise additional finance for home improvements or other purposes. This is called a re-mortgage and is a growing part of the home purchase market.

Tracker mortgage

The interest rate for this type of mortgage is linked directly to the Bank of England base rate. This means that every time the Bank of England base rate changes, the rate on the tracker mortgage is guaranteed to change by the same amount during the tracker period. This involves a degree of uncertainty as monthly repayments can vary, however it reflects a customer’s desire to follow market conditions throughout the term of their loan.

So if, for example, your mortgage is tracking at 0.5% above base rate and the Bank of England move its rate from (say) 4.75% to 4.5%, your mortgage rate would fall from (say) 5.25% to 5%.