When selecting a mortgage, the right type of mortgage could save you thousands of pounds, which is why it is essential to understand how they work.
Interest-only and Repayment
In general mortgages are interest-only or repayment; however, you can have a combination of both. With an interest-only mortgage, you only pay the interest each month. This means at the end of the mortgage term you have the entire loan to pay off unless you have made any over payments. With a repayment mortgage, you pay off a little of the loan each month as well as some interest.
The interest rate you pay remains the same throughout the length of the deal, regardless of interest rate changes elsewhere.
The most popular deals are the two and five-year fixed-rate offers, and when you reach the end of your fixed term, you'll usually be moved onto the lender's standard variable rate (SVR). At Greenshoots Financial, we will always contact you well in advance of your deal ending to discuss the best options available to you.
With variable-rate mortgages, the interest rate can change at any time, and these come in different formats:
Standard variable rate (SVR)
You will pay the lender's standard variable rate (SVR). Each lender has its standard variable rate, and while it's not directly linked, changes may occur after a rise or fall in the base rate set by the Bank of England.
With these mortgages, you pay the lender's SVR with a fixed discount off which applies for a certain length of time, typically two or three years.
This type of mortgage tracks the interest rate of England's base rate plus a few percent. So if the base rate goes up by 1%, your rate will go up by the same amount. Typically these deals last for periods between two and five years. However, there are a small number of 'lifetime' trackers for the entire mortgage term.
Capped Rate Mortgages
The rate of the mortgage would move in line with the lender's SVR, but the cap means the rate can't rise above a certain level.
These mortgages work by linking your current account and savings to your mortgage so that you only pay interest on the difference. You still pay your mortgage each month, but your savings act as an over payment which helps to clear your mortgage early.
There are several pros and cons of the various mortgage options, which is why we use our experience, knowledge and complete market access to help you secure the right mortgage for your needs.