Public Servant Lifestyle

Having chosen the repayment method that's best for you, now is the time to have a look at the type of mortgage that will best meet your particular needs.

There are seven main types of mortgage - Variable, Fixed, Discounted, Capped Base Rate, Tracker, Cashback and Flexible.

Variable Rate:

A mortgage lender's standard variable rate (SVR) is the rate that usually moves when the Bank of England base-rate changes. Most lenders change their SVR within a month of any alteration in the base rate.

The Government's CAT (charges, access and terms) standard for mortgages recommends that a lender's variable interest rate should be no more than 2% above the Bank of England base rate.

With most banks charging an interest rate of around 7.7% anyone paying their lender's SVR - and who is not tied in to the mortgage and so subject to a penalty for paying it off - should be looking to re-mortgage to a better deal. It is estimated that around 35% of homeowners could save money by re-mortgaging from their lender's SVR.

Fixed Rate:

Fixed rate mortgage deals set the interest rate for a given period of time, which means that your monthly payments remain the same for that period. Fixed rate deals usually last for between one and five years, although seven and 10-year deals are also available from a limited number of lenders.

Pros:

The major advantage of a fixed rate deal is that you know how much you pay each month and so can budget accordingly. They are especially useful where money is tight in the first year of a mortgage or where a home may need redecoration or repairs. If interest rates rise you will benefit from a cheaper mortgage, too.

Cons:

If interest rates fall below the fixed rate you will be paying more than need to for your mortgage. Also, you have to stay with the lender for a set period of time, known as a tie-in or lock-in. Usually, this is for the term of the fixed rate but some deals will tie you in for longer.

Discounted Rate:

These deals usually offer a percentage discount on the lender's standard variable rate up to 3% which can make for substantial savings. The best deals tend to fall in the one to three-year period. Discounted deals can also be stepped; for example, they might offer a 3% discount for the first year, 2% for the next year and 1% in year three.

Pros:

Discounted rate mortgages can have some of the best rates around. Since the discount is set when interest rates are coming down you can really benefit from lower monthly payments.

Cons: If interest rates rise so will your payments, although you will still benefit from a cheaper rate. Consequently, budgeting on a discounted rate is not as easy as on a fixed rate mortgage. Watch out also for extended tie-ins, i.e., those that keep you with the mortgage for longer than the discounted period.

Capped Rate:

Based on the lender's standard variable rate, capped rate mortgages place a ceiling on your payments for the period of the deal.

Pros:

If interest rates rise your payments will not rise above a certain leve,l while you will also benefit from any drop in rates.

Cons:

The deals are generally not as good as you will get with a fixed rate mortgage. Lock-ins are also common with capped rate mortgages.

Base Rate Tracker:

This type of mortgage has become popular in recent years as interest rates have fallen, as they follow, or track, the Bank of England base rate, either to a set percentage above or below that rate.

Pros:

Trackers are guaranteed to follow any reduction in the Bank of England base rate within a set period of time, which generally means borrowers benefit faster from rate changes.

Cons:

Interest rates go up as well as down and you are subject to the vagaries of the market in this respect.

Cashback:

You pay the lender's SVR but on completion of the mortgage application you are given a cashback cheque - usually either a percentage of the total loan or a set lump sum - to spend as you wish.

Pros:

Cashback can be particularly useful to meet moving costs or to help furnish a new home. They can amount to substantial sums - up to 7% of the home loan.

Cons:

Tie-ins are the big drawback to cashback mortgages. Many have extended tie-in periods and if you pay off or switch your mortgage to another lender in that time you will have to pay back at least part of the cash sum.

Flexible Rate:

Flexible mortgages offer a new and exciting alternative to the more traditional home loan. Flexible loans offer several benefits:

- They allow you to make over-payments without penalty

- They calculate interest on a daily basis which means the more you can pay off capital you owe the less interest you will be paying

- They allow you to make reduced payments or to take payments holidays (to the total sum of any overpayments). Flexible loans are aimed at the modern lifestyle and give borrowers greater control over their finances, as well as offering the opportunity to pay off the mortgage earlier.

Pros:

If you are able to make regular overpayments, it is possible to cut a 25-year mortgage by a third and save £25-30,000 in interest payments.

Cons:

Flexible mortgages follow the lender's SVR and so will cost more on a monthly basis than if you took out a fixed or discounted deal. Some lenders do offer fixed and discounted deals on their flexible mortgages, but at present these are for a limited period only, often three to six months.

To truly benefit from a flexible loan you need to be able to take advantage of the overpayment facility.

More information available in Your Home, Moving Home