There are many different types of mortgage available and it can often be confusing to know which one is right for you. Below are the basic details for some of the different mortgage types but we suggest you speak to one of our qualified mortgage advisers at no obligation for more information, or follow the link to see more details on how to apply for a Caboodle Mortgage
With this type of mortgage (also known as a capital and interest mortgage) your payments cover both the interest charged each month and also repay part of the capital borrowed. In the earlier years of the mortgage, a bigger percentage of your monthly repayment is made up of interest, however towards the end of your mortgage term the situation is reversed with the majority of your monthly payment reducing the capital balance. An additional repayment vehicle is not necessarily needed with a repayment mortgage and provided you make all the payments on the relevant date it is guaranteed to be repaid in full at the end of the specified term. A repayment mortgage is therefore simple, straightforward and easy to understand and avoids the risk of having to invest in the stock market or other investments for your repayment vehicle.
Interest Only Mortgage
With an interest only mortgage your repayments only cover the interest each month. This means that although your payments will be lower, the amount you borrow will still be outstanding at the end of the mortgage term and you will therefore need to make alternative arrangements to pay the balance off in full. Each lender has different views on what is deemed to be a “satisfactory repayment vehicle” for an interest only mortgage. Some lenders insist on traditional investments such as ISA’s, Investments and Pension Lumps whereas others may allow you to repay the mortgage from other assets such as the sale of a business, sale of other property or even the sale of your main home. Because investment returns can fluctuate and property prices can vary there is a higher risk with an interest only mortgage and you are not guaranteed that the balance will be repaid in full at the end of the mortgage term.
Standard Variable Rate Mortgage
Each mortgage provider has a Standard Variable Rate (SVR) which can vary from lender to lender. Your payments on this type of mortgage could vary in line with changes to the lenders SVR. Lenders will often change their SVR in line with changes to Bank of England base rate (BBR), but not necessarily at the same time or by the same amount. Some lenders may reserve the right to vary their SVR even if there has been no change to the Bank of England Base Rate. Most borrowers are transferred to the lender SVR once their initial incentive rate period comes to an end. An SVR mortgage tends to be simple to understand and often have no early repayment charges if you switch to another lender, but the rate can often be slightly higher than other rates available. There is also an element of unpredictability of interest rate movements which can may make it harder to budget for future costs
Fixed Rate Mortgage
A Fixed rate mortgage can give you the piece of mind in knowing what your monthly payments will be, at least for the given period of the fixed rate. With a fixed rate mortgage you pay the same rate of interest for a set period of time, which is typically 2, 3 or 5 years. Longer fixed periods are available but are not offered by all mortgage lenders. Your mortgage payments will not change within this `fixed period` even if there are changes to the Bank of England Base Rate or the Lender Standard Variable Rate. A fixed rate mortgage makes budgeting much easier as you will know exactly how much you are paying each month for the `fixed period`. In return for offering you a fixed rate mortgage most lenders will charge you a booking fee or arrangement fee to set it up. Early repayment charges may also apply if you redeem your mortgage or move to another mortgage company within the fixed rate period. At the end of the fixed rate period most mortgages will revert to the lender standard variable rate, although your adviser will confirm this once the lender has been recommended.
Tracker Rate Mortgage
With a tracker mortgage your payments vary if interest rates fall or rise. A tracker mortgage is usually linked to the Bank of England base rate, which means the rate will only change in line with any changes to the base rate. A tracker mortgage can also be linked to other rates such as the lender standard variable rate too. Tracker mortgages usually offer an initial incentive period, typically two or three years where the interest rate payable may be set at a small percentage above the rate being tracked. This initial rate is often lower than a fixed rate over the same period but of course may increase or decrease, making it harder to budget. At the end of the tracker mortgage `incentive period` the rate payable will continue to track the rate it was originally linked to but usually at a higher percentage above it which means the monthly payments can sometimes increase quite substantially. However, some tracker mortgage products remain at the same margin above the rate being tracked for the term of the mortgage so no such increase occurs. Unlike a Standard Variable Rate mortgage you will have the certainty of knowing that your rate will always move in line with the rate being tracked. Booking Fees and Early Repayment Charges for the initial incentive period are likely to be charged by most lenders offering tracker rate mortgages.
Capped Rate Mortgage
A capped rate mortgage offers you the security of knowing that your monthly payments will not rise beyond a certain level during the initial capped rate period. The rate payable can increase or decrease in a similar way to a variable rate mortgage but you have an element of security like a fixed rate because you know the maximum your payments could be within the capped rate period. This can make budgeting easier for some people but at the same time you could still benefit should interest rates fall at any time. A capped rate mortgage in essence gives you the best of both worlds, although they tend to have slightly higher interest rates than an equivalent variable rate or fixed rate product over the same period. Capped rate mortgages seldom last longer than 2 or 3 years and early repayment charges may apply for the duration of the capped rate period. Generally an arrangement or booking fee is payable to secure a capped rate mortgage. After the initial capped rate period ends you will normally revert to paying the lender standard variable rate, which could result in an increase in your monthly payments.
Discounted Variable Rate Mortgage
A discounted variable rate mortgage is similar to the standard variable rate product but allows you to benefit from a discount to the lender standard variable rate for an initial period, making your payments cheaper during that period. If the lender standard variable rate (SVR) increases or decreases, so does the rate you will pay. For example, if the lender SVR is 3.99% and they offer a discount of 1.49% for two years you will start off by paying 2.5%. If however the lender SVR increases to 4.99% you will pay 3.5%. Like any variable rate mortgage, with a discounted variable rate mortgage, there is an element of uncertainty as payments can change making it harder to budget. The lender may also reserve the right to increase their rates at any time independently to any changes to the Bank of England base rate, which will of course be detailed in the mortgage offer. Early repayment charges are likely to apply for at least the term of the discount mortgage period and there is generally an arrangement or booking fee payable. After the discount period ends you will normally have to pay the lender standard variable rate which may lead to a change in your monthly payments.
A flexible mortgage can often offer a number of different features which you would not get with a traditional mortgage. Flexible mortgages can allow you to vary your monthly repayments, make overpayments, make underpayments, take payment holidays or make lump sum payments, all without you being charged by the mortgage lender. By making payments which are higher than the scheduled monthly payments or paying off lump sums you may be able to repay your mortgage more quickly and significantly reduce the amount of interest payable over the mortgage term. Some flexible mortgages allow you to borrow back any overpayments you may have made at the prevailing mortgage rate, should you need to raise any additional money in the future. Also, with a flexible mortgage, if your budget is stretched for any period of time you may be able to take a payment holiday to ease the situation. Most flexible mortgages calculate interest on a daily basis which means every payment you make has an immediate impact on the amount outstanding on your mortgage. This flexibility however comes at a price as interest rates tend to be slightly higher on a flexible mortgage in return for the lender offering these additional features. If you do not want or intend to take advantage of some or all of the options available you may find you could get a lower interest rate through a different product, such as a fixed rate mortgage or a tracker rate mortgage. Most flexible mortgages feature a variable rate which means that payments can increase or decrease in line with interest rates making it harder to budget. Early repayment charges may still apply and in most cases there will be an arrangement fee or booking fee payable to get a flexible mortgage.
A cashback mortgage, as the name suggests, pay out a lump sum when the mortgage is taken out. This money can then be used by you for any purpose such as home furnishings or debt consolidation. In return for providing you with a cash lump sum you will usually find that the interest rate payable is linked to the lender standard variable rate making it harder to budget. The rate on a cashback mortgage may also be higher than on other mortgage products making your monthly payments more expensive. There is usually a lack of flexibility with this type of product and early repayment charges will usually apply for an initial period.
An offset mortgage, also known as a current account mortgage, will allow you to offset the balance of any savings and/or current account held with the same lender against your mortgage and only pay interest (typically calculated on a daily basis) on the net balance between the accounts. With an offset mortgage you are unlikely to earn interest on your savings as they are offset against your mortgage, but depending on the level of savings you can substantially reduce the amount of interest payable on your mortgage. An offset mortgage can be useful if you anticipate making overpayments on your mortgage in the future, which you would still have access to at a later date. However, offset mortgages can sometimes be difficult to understand as they are quite complex and you need to be disciplined to make sure you keep on track with your mortgage payments. Many offset mortgages feature a variable rate which means that an increase in interest rates would be reflected in increased monthly payments, although fixed rates are available with some lenders. To obtain an offset mortgage you may also be required to move your personal bank account to the new mortgage lender.
For more information speak to one of our advisers today on 0845 219 0427 or 0121 308 9114. Alternatively complete the short online enquiry form to request a call back.
We can often arrange face-to-face appointments in Mere Green, Four Oaks, Sutton Coldfield, Lichfield, Tamworth, Burton, Birmingham, Walsall, West Bromwich and many other surrounding areas of Staffordshire and the West Midlands. Alternatively we can make arrangemtns for you to visit our offices to discuss your requirements in more detail.
The overall cost for comparison is 4.5% APR. The actual rate available will depend upon your circumstances. Please ask for a personalised illustration.
Caboodle Financial Services Ltd
240B Lichfield Road
Sutton Coldfield B74 2UD
Telephone: 0121 308 9114