Mortgage Types

Redemption penalties

Some lenders can also include an extended tie-in. In this case the redemption penalty is payable even after the fixed mortgage rate has ended. Your initial rate could finish but you may not be penalty free for a further year or two years for example. It is rare that these rates would be recommended under any circumstances.

What are the pros and cons of a fixed mortgage rate?

Fixed mortgage rates - The good points:

The main advantage of having a fixed rate mortgage is that it gives you peace of mind and makes budgeting so much easier. If the Bank of England's base rate rises during your fixed rate mortgage you could end up saving yourself thousands of pounds.

Fixed mortgage rates - The bad points:

Early repayment charges (ERCs) tend to be higher. Most fixed rate mortgages will have ERCs throughout the term of the fixed rate as already highlighted.

If interest rates fall you may find yourself paying more than you would have done had you not fixed.

Tracker Mortgage Rate

Tracker mortgage rates are mortgages that are directly linked to the Bank of England's base rate. These rates may be lower than the fixed mortgage rates available but they do not come with the security that a fixed rate offers.

With a tracker mortgage the rate will normally be a fixed amount above the Bank of England’s base rate but it can vary, moving up and down according to the movement in the base rate. Some companies also offer 'lifetime' trackers for the duration of the loan. For example, a tracker mortgage rate may be set at 2% above the base rate. This means that should the base rate be cut, you will benefit immediately as you don't have to wait for your mortgage lender to decrease their standard variable rate. Should the base rate rise however, your mortgage payments would also increase almost straight away with little notice.

Tracker mortgage rates are not to be recommended if you are on a tight budget and/or you need to have the peace of mind that your mortgage costs are not going to increase unexpectedly.

A tracker mortgage could be cheaper than the more popular fixed rate mortgages if rates do not increase over the period but the longer the initial period, the more risk.

Redemption penalties

Most new mortgages come with an associated redemption penalty/tie-in. Lenders will only offer a lower tracker mortgage rate if you agree to their redemption terms. Should you leave, or pay off the mortgage you would need to pay a redemption penalty. This is usually a percentage of the outstanding mortgage and will be included in your total redemption balance.

Some lenders can also include an extended tie-in. In this case the redemption penalty is payable even after the tracker mortgage rate has ended. Your initial rate could finish but you may not be penalty free for a further year or two years for example. It is rare that these rates would be recommended under any circumstances.

Discounted mortgage rates are as they sound. The lender offers a discount on their standard variable rate, normally for a set amount of time, for the first two, three or five years. In recently years, discount mortgage rates have been less popular with low interest rates and increased availability of tracker rate mortgages and fixed rates.

A discounted mortgage rate should not to be recommended if you are on a tight budget and/or you need to have the peace of mind that your mortgage costs are not going to increase unexpectedly.

A discount mortgage rate could be cheaper than the more popular fixed rate mortgages if rates do not increase over the period but the longer the initial period, the more risk.

Redemption penalties

Most new mortgages come with an associated redemption penalty/tie-in. Lenders will only offer a lower tracker mortgage rate if you agree to their redemption terms. Should you leave, or pay off the mortgage you would need to pay a redemption penalty. This is usually a percentage of the outstanding mortgage and will be included in your total redemption balance.

Some lenders can also include an extended tie-in. In this case the redemption penalty is payable even after the tracker mortgage rate has ended. Your initial rate could finish but you may not be penalty free for a further year or two years for example. It is rare that these rates would be recommended under any circumstances.

An offset mortgage generally allows you to offset any credit balances you have in any eligible current and savings accounts and Cash ISA's against the mortgage balance and pay interest (at the mortgage rate) on the difference only.

This means that you could potentially reduce the total amount of interest you have to pay on the mortgage or reduce your monthly repayments. You would however forfeit any other interest on your credit balances being used to offset.

When offsetting credit balances against the mortgage, you would often have the option of maintaining the original mortgage repayments, thereby paying the mortgage off more quickly, or keep the original term and reduce the monthly repayments. Mortgage repayments may therefore vary. Either option may provide substantial savings and may be a more effective than just leaving the money in a normal deposit account with a moderate rate of interest.

The advantages extend even further if you are a higher rate taxpayer and normally pay additional interest on savings. With an offset mortgage, you could potentially cut years off your mortgage, saving thousands of pounds in interest payments or, if preferred, pay less on their monthly mortgage repayments.

Sometimes the interest rates for offset mortgages can be slightly higher than the more traditional fixed mortgage rates, tracker mortgage rates or discounted loans so it is important to take this into account when choosing a mortgage.

What type of Offset Mortgage?

The market for offset mortgages has increased over the years since these types of mortgages were introduced. With some lenders you'll be able to have fixed rate offset but they are not as common as tracker offsets. When they were first introduced into the UK, the interest rates were a lot higher than standard mortgages but they are now far more competitive. It is therefore sensible to always consider an offset mortgage where possible.

Fees

An offset mortgage can attract higher fees than the more traditional loan so it is worth taking this into account.

Redemption penalties

Most new mortgages come with an associated redemption penalty/tie-in. Most mortgage lenders will only offer an offset mortgage if you agree to their redemption terms. Should you leave, or pay off the mortgage you would need to pay a redemption penalty. This is usually a percentage of the outstanding mortgage and will be included in your total redemption balance.

There are many types of mortgages that say they are 'flexible mortgages', some however just come with some flexible options.

Flexible mortgages come in different forms but the one thing they all have in common is features that allow you to pay off your mortgage with fluctuating monthly payments.

The best flexible mortgages allow you to benefit from the above advantages but often still have restrictions. For example you may still need to pay a minimum amount each month. You may still need to specifically 'request' a payment reduction or holiday.

The best thing you can do with a flexible mortgage is to overpay. This means that you will clear your mortgage early and potentially save thousands of pounds in interest.

You can sometimes borrow back if you have already overpaid and your circumstances have changed.

The best flexible mortgages also have no redemption penalties (ERC's) if you want to repay your mortgage early. These are very rare in recent years with the lowering of interest rates. Flexible mortgage lenders would prefer you to stay with them rather than changing frequently.

Flexible mortgage alternatives

Most high street mortgage lenders include some flexible mortgage options within their mortgages. Most will allow you to overpay up to 5 or 10% per annum without any penalties although some have minimum or maximum limits if you want to do this. Most mortgage lenders will also allow you to underpay on your mortgage or take payment holidays but this will normally only be allowed if you have already overpaid, IE built up a form of credit balance. These normal fixed rate mortgages, tracker rates, discounted rate mortgages may not be fully flexible but if you are only looking to overpay by £50 or £100 per month you may not need the fully flexible mortgage. You may also want to read our section on Offset Mortgages. Offset's can have a lot more advantages than wither normal flexible mortgages or the traditional loans.

It is worth mentioning that non-flexible mortgage lenders can reserve the right to withdraw their overpayment facility at anytime. If so this would be noted in the mortgage offer or the initial key facts illustration. To find out more about flexible mortgages, please contact us and we will be more than happy to help.