Like any other financial product, mortgages come with a range of different terms attached, and in a number of different categories. Knowing what you’re looking for is the first step to getting the right mortgage, so here’s a guide to the three main types.
Tracker Mortgage
First of all, it’s important to point out that many mortgages are a combination of ‘tracker mortgages’ and ‘fixed rate’, for example, Santander’s current offering for first-time buyers offers two years on a fixed rate and then the rest on a tracker (check the site for up to date information on Santander’s mortgages).
A tracker mortgage is one where the interest rate that you pay follows the Bank of England base rate, although generally the rate charged will be two or three percent higher than the base rate. These are great when interest rates are low and steady, but should they fluctuate, tracker mortgages can become more expensive.
Fixed Rate
A fixed rate mortgage is one where the rate of interest stays fixed in one place for a protracted, pre-agreed period. It’s usually a fairly good indication of where the banks think the interest rate is going to go in the short term. Some people were unlucky just before the financial crisis and fixed their mortgage rate above 5% (interest rates then crashed leaving them paying far over the odds), so you have to be careful with fixed rates.
Interest Only
Interest only mortgages are mortgages where you start off by paying off just the interest. This interest represents the sum that you would have accumulated over the entire course of the mortgage. Interest only mortgages are often a little cheaper, because the customer has the incentive not to move the mortgage for a prolonged period, after all, if you pay the interest for four years and then move on, you won’t actually have paid down any equity in the house. So, if you’re thinking of settling in for a long period, or if times are particularly tough, interest only can be the way to go.
And a final thought…
Although mortgages generally have terms of more than twenty five years, that doesn’t mean that you have to stay with the same provider throughout, in fact, moving your mortgage around can be a good way of paying it off quicker. However, remember that many providers charge setup fees, so if you’re thinking of changing provider you have to be sure that the long-term benefit will be greater than the setup fee.
