Mortgage product guide

Fixed Rate Mortgage

If you choose a fixed Rate Mortgage your monthly repayments will not change for the period of the fixed rate, regardless of interest rate movements. This may be important to you if you have a limited budget as you are protected from rising interest rates. However, if the variable rate falls below the fixed rate level, your repayments will not fall. At the end of the fixed rate period your mortgage will usually be converted to a variable rate.

Fixed rate deals are available over varying periods. Some are as short as a few months and others over many years. Often with fixed rate deals there will be an Early Repayment Charge if you change your mortgage or pay it off before the fixed term ends. The amount of the penalty is usually a percentage of the outstanding mortgage balance or a number of days interest. The earlier you opt out of the mortgage product, the more you will have to pay. This can equate to thousands of pounds. Some 'headline' fixed interest rate deals have extended 'tie ins', which means the penalty period extends past the initial fixed rate period. There are products available without these penalties.

Base Rate Tracker Mortgage

A base rate Tracker mortgage is usually linked directly to the Bank of England base rate with a possible loading for a set period or for the term of the loan. The rate payable will change in line with any movement to the Bank of England base rate.

This means that you cannot predict the monthly cost of the borrowing. In times of falling interest rates variable Rate Mortgages are beneficial, as your mortgage repayments will reduce. However, if interest rates rise, then so will repayments.

Capped Rate Mortgage

A capped Rate Mortgage has a maximum interest rate for a specified term. The interest rate you pay cannot go higher than the agreed capped rate; thus you know the maximum amount your monthly repayments could rise to. However, if the basic interest rate falls below the capped rate, repayments will also reduce.

Sometimes these capped Rate Mortgages also have a 'collar'. This means the lender has set a minimum level below which the rate you pay will not fall.

Discounted Rate Mortgage

A discounted mortgage offers you reduced monthly repayments for a specific term. The lender gives a discount off their Standard Variable or Tracker Rate. For example, the variable rate may be 6% with a discount of 1%, making the initial interest rate 5%. If the variable rate on which your discount rate is based falls, your repayments will fall. However, if the lender's standard variable rate rises, so will your repayments. A discounted rate may be helpful initially.

Often with discounted rate deals there will be an Early Repayment Charge if you change your mortgage or pay it off before the term ends. The amount of the penalty is usually a percentage of the outstanding mortgage or a number of days interest. Generally, the earlier you opt out of the mortgage product the more you will have to pay. This can equate to thousands of pounds. Some discounted deals have extended 'tie ins' meaning the penalty period extends past the initial deal rate period.

Variable Rate Mortgage

A Variable Rate mortgage is one in which the amount you repay increases or decreases in line with any interest rate changes. This means that you cannot predict the monthly cost of the borrowing, which could cause financial difficulty during the mortgage period. In times of falling interest rates, Variable Rate mortgages are beneficial as your mortgage repayments will reduce. However, if interest rates rise, then so will repayments.

100% Mortgage

A 100% mortgage gives you the ability to borrow 100% of the value of the property, i.e. you will not need to find or save for the deposit. Rates may be fixed, variable, discounted or capped (see above for more information). Opting for a 100% mortgage means that you could risk facing a negative equity situation if house prices fall. You may also be charged an above-average interest rate and a Higher Lending Charge.

Self-certification Mortgage

Self-certification mortgages are available for clients who cannot verify their income as it may come from a number of sources, or they may not have been trading for long enough to have the required number of years accounts, or they may have a low basic salary but achieve bonus or commission payments or a regular second income. The lender will ask for details of the borrower's income, but they will not require to see proof of total earnings. Other terms will depend upon the lender's requirement at the time and in accordance with the rates prevailing in the market place.

It is a criminal offence to mislead or lie to a lender about your income.

Buy-to-Let Mortgage

Buy-to-let mortgages are provided for property purchases or remortgages for investment in the private rental sector. Assessment of borrower affordability can be based on projected rental income and/or earnings, dependent on the lender's individual policy.

Buy-to-let mortgages can be fixed, capped, discounted or variable. Some may be base rate trackers, or have cashbacks or flexible features.

Current Account and Offset Mortgages

A Current Account mortgage allows you to operate your mortgage borrowing through a current account. In effect, it is like having a large overdraft. Thus, if you had a mortgage of £100,000 and £5,000 credit in your current account your account would show a negative balance of £95,000 You may be required to pay your salary into these accounts.

These mortgages can allow you to pay off your mortgage early as any cash going into the account, such as salary credits, reduces your outstanding debt and the interest charged on it. Therefore, if you are disciplined you can save on the amount of interest you repay and reduce the remaining term of your mortgage. Many lenders show you on a regular basis whether you are 'on track' or above / below track with your payments.

Some providers also allow loans to be attached to these mortgage accounts, with interest charged at the same rate as the mortgage. This means all of your debts are held centrally in one account.

With an Offset mortgage you keep your account balances separate with one provider (mortgage, savings, current account etc) but all credit balances offset the debit balances on which interest is charged. This means that the credit balances do not accrue interest which potentially could be tax efficient, especially for Higher Rate Taxpayers.

With some of these mortgages you can make under-payments which means if in one month you have an unexpected expense you can pay less off your mortgage. Payment holidays may also be available whereby you pay nothing for a month or so. Over-payments may also be permitted.

Most Current Account and Offset mortgages are Variable Rate mortgages.

Cashback Mortgage

A Cashback mortgage provides a cash rebate on completion of the loan. The sum is either a percentage of the loan advanced or a fixed sum. The cashback could help you cover some of the expenses of setting up a home, but this bonus is often subject to higher interest rates and is likely to incur Early Repayment Charges if the loan is repaid early (typically the first five years).

A Cashback may be offered on Fixed, Variable or Capped rate mortgages.

Flexible Mortgage

Flexible Mortgages provide a number of flexible features. These might include options to make extra payments when you have extra money and underpayments / payment holidays when money is a little short. You will normally have to build up a reserve through making overpayments before the underpayment arrangement is allowed. Such mortgages are usually offered on a daily rest interest basis. Flexible mortgages usually provide a loan draw-down facility that allows you to borrow extra funds at a set predetermined rate for large purchases or school fees.

Special schemes

Most lenders have special schemes which are specifically targeted at customer groups. These include Shared Ownership, Right to Buy and First Time Buyer schemes. For more information please call our consultants free on 0800 298 5136.