A mortgage is a loan that mortgage lender or a bank gives you to help finance the purchase of a home. A mortgage payment is constituted of four parts: principal, interest, taxes and insurance. It is monthly paid on a monthly basis. There are many types of mortgages, and they are classified by the way the interest is charged or how te interest rate changes over time. If you want to know more about how mortgages work, read more.
Each type of mortgage has its benefits and negatives, and you will need to consider all of them to see which one helps you the most:
- Standard variable rate mortgage: Standard variable rate mortgages have an interest rate that has to be paid every month but can vary from one month to the next one. Standard variable rates usually come with several options for borrowers such as leaving the mortgage deal with little get out fees or being able to pay off more of the mortgage earlier on, which makes remortgaging cheaper.
- Fixed-rate mortgage: A fixed rate mortgage is one in which the interest rate remains fixed throughout a previously agreed term. It usually involves a two-year or five-year deal. At the end of the fixed-rate period, the interest rates often default to a variable rate based on the base rate of the lender. A fixed rate mortgage has the benefit of peace of mind because you know what interest rate you are going to pay and for how long. It helps with budgeting; you will be no longer surprised by sudden increases in rates and outgoings.
- Tracker mortgage: On a tracker mortgage, the interest remains directly proportional to another base interest rate, plus a few percentage points. The tracker mortgage is likely to track the base rate for a short term until it defaults to the standard variable rate of the lender. It will help you to keep the mortgage payments more predictable and fair for the borrower.
- Discount mortgage: Discount mortgages are usually more beneficial to new customers and first-time buyers. A discount mortgage gives a discount on the rate that needs to be paid back. This type of mortgage is good for first-time buyers, as they can provide cash relief early on in the mortgage deal.
- Capped rate mortgage: A capped rate mortgage rate deal straddles the line between a variable rate mortgage and a fixed-rate mortgage, giving borrowers a limit in which they can budget.
- Offset mortgage: This is a good way to save the amount of interest you pay on a mortgage over its terms and are an excellent choice for those with a significant amount of savings.
For a better understanding of all of these types of mortgages, it is important to get professional advice in which type of mortgage suits you the better. This video explains the four parts of a mortgage mentioned at the beginning, and how a mortgage works, it will help you to understand better all the mortgage process before you meet a real estate agent.