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In this article, I will be explaining the different types of mortgage products that are available in the mortgage market, hopefully after reading this article you will have a better understanding of mortgages, and the products available, and therefore be able to choose which is the most suitable for your circumstances.
Firstly, I am going to talk about variable rate mortgages. There are four different types of variable rate mortgages, they are; standard variable rate, discounted, cashback and trackers. Although all of these products are slightly different they are all variable, which means they can go up or down.
A standard variable rate mortgage is the most frequently heard of mortgage product, the interest rate will vary throughout the term by reflecting the influences of things such as; the Bank of England base rate, competitors’ rates, and the bank’s current base rate.
A discounted product is related to the standard variable rate but offers a discount for a set period of time i.e two years, however some of these deals come with heavy early redemption penalties if you no longer want the mortgage when you are still in the discounted period.
Cashback mortgages offer an incentive of a percentage of the loan paid as a lump sum at the start of the mortgage i.e 3%, however early repayment charges are very commonly applicable on these types of mortgages, and the cash back may have to be repaid when the term expires.
Finally, tracker mortgages, these mortgages track movement in interest rate indicators such as London Inter Bank Offered Rates (LIBOR). The tracker may only last for a certain period of time and early repayment charges may accompany this.
The next type of mortgage product is a fixed rate mortgage. A fixed rate mortgage offers a guaranteed rate of interest payable for a certain amount of time i.e three years. On the majority of fixed rates early repayment and administration fees are chargeable if you no longer want the mortgage before the end of the fixed period.
A fixed rate can be what’s called; capped and collared, although technically it is not completely fixed the interest rate payable cannot go above a certain level (the cap) or below a set rate (the collar). You can also get mortgages that are capped but not collared, which means that the interest rate payable cannot go above a certain level but can decrease unlimited.
The last type of product I am going to talk about is flexible products, the main types are; Offset/Current account, Deferred interest and CAT standard mortgages. An Offset/Current account mortgage is where the borrower has all of there mortgage, savings an current account combined into one, the idea of this mortgage is it allows the borrower to offset any surplus funds against the mortgage and therefore repay it quicker.
Deferred interest mortgages allow the borrower to pay only part of the monthly interest repayment due for a fixed period of time. This means the borrower has effectively reduced short term payments, but increased payments in the later years of their mortgage.
CAT standard mortgages; CAT stands for charges, access and terms. This means that the mortgages meet the minimum standards set out by the HM Treasury. There are different standards dependant upon the product type i.e fixed or variable.
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