Variable Rate Mortgages

The monthly payment fluctuates in line with the lender's standard variable mortgage rate which is set at the lender's discretion. This can cause budgeting problems in times of increasing interest rates. Some lenders offer an annual review so that the amount you pay only changes once a year with the difference adjusting your outstanding mortgage.

With a standard variable rate you can usually leave your lender without any penalties. You may also be able to pay back extra amounts (and reduce the amount you owe and interest you pay) without penalty too. As a result, whilst you may be able to stay on the lenders standard variable rate when you come to the end of an existing mortgage deal, many lenders will not offer their standard variable rate to new borrowers.

Tracker Rate Mortgages

A tracker rate also has a variable rate of interest but rather than a rate set at the discretion of the lender it has an interest rate that's equal to, or a set amount above or below another rate, usually the Bank of England Base Rate or some other base rate. The rate charged on the mortgage tracks (moves up or down with) that rate usually for a set period, typically 2 or 3 years. Some lenders though offer tracker rates that track a rate for the term or life of the mortgage.

With a tracker mortgage you may not be able to leave your lender without any penalties, especially during the tracker deal period. You may also have to pay an early repayment charge if you pay back extra amounts (and reduce the amount you owe and interest you pay) during the tracker period. It can pay to go for a tracker if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down. It's not a good choice if your budget won't stretch to higher monthly payments.

Fixed Rates Mortgages

On a fixed rate mortgage your payments are set at a certain level for an agreed period as the rate of interest charged is fixed. At the end of that period, the lender will usually switch you to the standard variable rate. With a fixed rate mortgage you may not be able to leave your lender without any penalties, especially during the fixed rate period. You may also have to pay an early repayment charge if you pay back extra amounts (and reduce the amount you owe and interest you pay) during the fixed rate period.

The advantage of a fixed rate mortgage is that your payments will stay the same during the period of the fixed rate, even if interest rates go up. This gives you the security of knowing that you can afford your payments and will make it easier for you to budget. If rates go down, you won't benefit. Your payments will stay at the higher rate.

Discounted Rate Mortgages

Like a standard variable rate your monthly payments can go up or down if you choose a discounted rate mortgage but you get a discount on the lender's standard variable rate for a set period of time. At the end of the deal, you usually change over to the full standard variable rate. Discounted rate mortgages can give you a gentler start to your mortgage, at a time when money may well be tight. But you must be confident you can afford the payments when the discount ends.

The discount period is limited, so don't get used to those early low repayments. You may not be able to make overpayments and pay off the loan early without penalties and like standard variable rates the lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down.

Flexible Mortgages

These schemes allow you to overpay, underpay or even take a payment holiday. Any unpaid interest will be added to the outstanding mortgage. Any overpayment will reduce your outstanding mortgage. Some have the facility to draw down additional funds to a pre-agreed limit.

Lenders that offer any type of fixed rate, discount or tracker rates to attract new customers usually require the mortgage to stay with them for a period of time to recoup their costs. They do this by imposing an early repayment charge for a given period which can extend beyond the benefit period. They will usually make an early repayment charge if you want to redeem your mortgage early. Early repayment penalties may also be charged if you die within the early repayment period so you should consider building this in to the level of life cover you have. You should also make sure that you can afford the standard variable rate that will be charged at the end of the discounted or fixed-rate period.

Capped and Collared Rate Mortgages

Some lenders offer variable, tracker or discounted products that have a pre-defined upper ‘cap’ or lower ‘collar’ that the rate will not go above or below when rates go up and down.

Buy To Let Mortgages

It’s important to remember that buying a property to let isn’t the same as buying your home. Very often, you’re not looking for something that appeals to you, you’re looking for something that’s attractive to possible tenants. It’s a commercial decision rather than a personal one.

So you need to do some market research before you decide on the property and choose how you’re going to pay for it. Get out and about, checking the area, finding out whether rented accommodation is popular, and looking at the prices of similar properties. You could start by visiting estate agents and checking the local papers.

Another thing to think carefully about is the type of property you’re looking for. Again, remember you’re not looking for somewhere you’d like to live, you’re looking for a property that’s going to be easy to let. So decide on the type of property that’s best suited to being rented out and one that’s likely to increase its value over time.