Understanding different types of Mortgages
While choosing a mortgage, everyone’s main focus is on the interest rates and the amount of fee charged on that mortgage.
What we fail to realise is that there are various factors that we need to keep in our mind before choosing a particular type of mortgage.
After reaching towards the end of the article you will get to know about the base and different types of mortgages that are there in the financial industry.
One should have a clear idea about the mortgage types, their recall value, the penalty fees and much more, before making any judgment regarding the investment or mortgage deals.
Here are different types of mortgages with a detailed explanation.
There are two major types of mortgages: (All the type of mortgages have their own characteristics and pros or cons.)
- Fixed rate mortgage (FRM)
- Variable rate mortgage (VRM) or Adjustable Mortgage Rate (ARM).
Fixed Rate Mortgage
In a fixed-rate mortgage, the interest rate remains constant/fixed for a few years which then, in 2 to 5 years bracket, changes in the variable rate.
Variable Rate Mortgage (VRM) or Adjustable Rate Mortgage (ARM)
The interest rate on the Variable Rate Management can change anytime.
To be on the safer side, always make sure that you have some savings aside for the payments if the rates increase.
Various forms of Variable Rate Mortgages (VRM) are:
Standard Variable Rate (SVR):
An interest fee (normal interest rate) has to be paid to the mortgage lender which will last as long as your mortgage or until you take out another mortgage deal.
SVR has its own merits and demerits. It gives you the option to either overpay or to stop paying the interest at any point of time, but the demerit is that the rate can be changed at any time during the loan.
SVR carry features that are flexible such as offset facilities, redraw extra payments and the ability to split loan.
In order to benefit these features, the borrower generally pays a higher amount of interest.
An off discount that you get on the lender’s standard value rate which is applicable for a certain period, say for two to three years.
Another factor to keep in mind is that the SVR differ across the lenders. When it comes to its advantages, it has cheaper starting rate and keeps the monthly repayments low.
Also, you’ll pay less each month if SVR is cut in by the lender. On the downside, the lender has the liberty to increase SVR at any time.
For example, if the SVR goes up to 6% at a later date, the rate of discount would go up to 5% and it would go down to 1% if the SRV goes down to 1%.
It is the type of mortgage which is directly proportional to the interest rate, i.e., if the base rate is increased by 1% then your rate will increase proportionally.
The lifespan of the mortgage is similar to that of the discount mortgages.
The advantages and disadvantages of tracker go side by side i.e., your mortgage rate will go down with the decrease in tracking rate and will go up with the increase in tracking rate.
Tracker rate does not match the rates they track, but the margin above the rate.
There is the lower rate in the introductory margin, for example, base rate plus 1%. So on a base rate of 0.5%, the rate paid will be 1.5%.
Capped mortgage rate means that the rates will be aligned with the lender’s Standard Variable Rate and won’t rise to a certain level.
The key here is that the rates won’t rise after a fixed cap but make sure that you can afford the rate if it goes beyond the capped rates.
An example of it is, a 10-year loan may be issued to a borrower at 6%, but with a capped rate of 9%.
The interest rate can therefore fluctuate, but can never get higher than the 9% capped rate.
There are a lot of decisions that you should take into consideration before taking any type of mortgage deals, and you should always learn about the exit penalty fees for withdrawing the deal at your convenience.
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