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Guide for Buyers and Sellers | 7
Different types of
mortgage
Once you have decided on an interest only or
repayment mortgage, you have to decide how
you would like the interest on the loan to be
charged.
This can be:
Standard variable rate (SVR)
The rate of interest you pay changes when the
lender reduces or increases its lending rate -
known as the standard variable rate. This type is
mainly for people who prefer to follow general
rates as they are changed by the Bank of
England.
Cashbacks
Choosing a mortgage linked with a cashback
gives you a cash lump sum, tax-free, on comple-
tion of your mortgage. They come in discounts,
trackers or fixed rates so you need to choose
which type of mortgage you would prefer and
then the cashback is an added bonus.
By giving borrowers a fixed lump sum or a
percentage of the loan as a lump sum, lenders
offered an attractive incentive to take out one of
their mortgages. To start with you must decide
on the type of cashback you want - one based as
a percentage of the sum you are borrowing, or
simply a cash lump sum. If you decide on a per-
centage cashback, the amount of money you get
as a cashback will be determined by how much
you are borrowing. This in turn could be dictat-
ed by the size of the deposit you are able to put
down. arrangement fees and redemption penalties. You believe that interest rates are going to rise, or for
In the past, cashbacks as a percentage of the may also find that the lender’s standard variable those who want to know exactly what their
loan tended to be higher amounts than a fixed rate you end up paying may not be very compet- mortgage repayments will be for a set period.
sum. For instance at one point cashbacks of 6-7 itive.
per cent were reasonably common whilst fixed Tracker
sum cashbacks tended to be in the region of Fixed The tracker mortgage is a loan with an interest
£200-300. Your lender may offer a mortgage where the rate set at a specific margin above the Bank of
There are currently very few cashbacks cur- interest rate is fixed for, say, two to three years or England base rate. So, for instance, if you agree
rently available so I would not look for this type sometimes longer so your monthly mortgage to pay a tracker rate of 1 per cent above base rate
of mortgage as priority. payments stay the same during that period. After and the base rate is 6 per cent, you pay 7 per
the fixed term is over the interest rate you pay cent. When the Bank of England’s rate changes,
Discounted will revert to your lender’s usual variable rate and your mortgage rate will change accordingly, but
With this type of interest rate, the lender drops a will then fluctuate in line with interest rate maintaining that 1 per cent differential. During
few percentage points off its variable lending changes. Alternatively, you could then take out a the period of the tracker, your lender can not
rate. Some lenders offer discounts only to first- new fixed-rate mortgage. increase the interest rate you pay unless the Bank
time buyers, but others offer them to all their There are disadvantages to taking out a fixed of England increases its rate.
customers. Some discounts tend to vary depend- rate loan, but these are similar to those associated As with discounts and fixed rates, the tracker
ing on the size of deposit you put down so the with discounted interest rates. If the loan is paid tends to last for a certain period only and then
less you borrow the better the interest rate. off or redeemed within a certain period, the your mortgage will revert to the lender’s standard
Discounted rates are only on offer for a certain lender will charge a redemption penalty, for variable rate. Some borrowers with trackers have
period of the mortgage term, say six months, a instance up to six months’ interest on the loan. recently discovered that their lenders have put a
year or five years, and then the interest rate you Some fixed-rate mortgages are not portable so limit to the level at which rates could fall in the
pay reverts back to the lender’s variable rate. you have to redeem them each time you move, small print. So, if your tracker is set at 1 per cent
Beware, if you are choosing your lender purely incurring possible redemption penalties. You above base rate and the lender has limited any
because of the amount of discount you will may also suffer from having to suddenly increase drop in rates to 3 per cent, if base rates fall below
receive - you don’t get anything for nothing. The (sometimes significantly) your monthly pay- that level, your tracker rate will stick at 3 per cent
mortgage you are considering is very likely to ments once the fixed term has ended. until rates go up again and then the tracker dif-
have a number of clauses attached to it, such as This type of mortgage is ideal for those who ferential will restart. Check the small print.
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