Offset mortgages
An offset mortgage is typically a variable-rate product that links your loan balance with money in a designated savings account.
For example, you’ll likely only pay interest on £70,000 of a £100,000 mortgage if you keep £30,000 in the linked account. Your savings aren’t spent, but they will reduce the amount on which interest is calculated, potentially lowering monthly costs or cutting the overall term.
At a broad level an offset mortgage typically appeals to customers who have or will have funds on deposit that they want to use to reduce their mortgage term or monthly payments.
For example, professionals with variable income or property investors who keep cash on hand for projects say, giving the ability to withdraw savings any time. It’s also worth considering for those who have savings balances in an instant access account for which there are no particular plans.
This mortgage product is usually paired with variable or tracker rates, so your payments can still move even though your effective interest cost is reduced. However, offset mortgages are often offered at higher rates of interest.
Read more: What is an offset mortgage?
Fixed-rate mortgages
With a fixed-rate mortgage, the interest stays locked in for a set period (generally two, five or 10 years), which under some circumstances can make rates lower than some other mortgage products, enabling predictable budgeting and shielding you from sudden rate hikes. However, be aware that you may lock in a rate only for the base rate to fall, so you may end up paying a higher amount than if you’d taken out a tracker or variable rate mortgage (see below).
Borrowers often choose this structure when purchasing a house because they know exactly what their monthly repayments will be during the fixed term.
Many first-time buyers (FTBs) are not used to owning a property or the associated running costs, making them more likely to choose a fixed-rate mortgage with stable payments. Later on in the mortgage lifecycle, some may switch to an offset mortgage, as they may have accrued savings and can use them more efficiently by then. They might also enjoy more flexibility by making lump sum reductions without incurring any early repayment charges (ERCs).
After the fixed window ends, you'll normally move to the mortgage lender's standard variable rate (SVR) unless you decide to remortgage. With a remortgage, your rate can then rise or fall, so it's wise to make a note of the expiry date and review your next steps in good time.
Lenders sometimes reduce or raise two- and five-year fixed rates as competition shifts, so check the early repayment charge and any arrangement fee before committing.
Variable-rate mortgages
A variable-rate mortgage typically lasts anywhere from two or three years to five or ten years, moving up or down with the lender’s SVR. Lenders set their own SVR, they don’t peg it to an independent benchmark, and so can change it at any time, which can lead to quickly changing monthly payments. Variable deals suit borrowers who are comfortable with fluctuation or those who expect rates to fall.
There are several different types of variable rate mortgages:
- SVR mortgage: This becomes your rate once an introductory deal ends, with the lender subsequently raising or lowering it at any time afterwards.
- Discounted rate mortgage: This offers a temporary reduction below the lender's SVR, but it still shifts whenever the SVR changes.
- Capped rate mortgage: This is a variable deal with an upper limit, so your rate can fall but never rise above an agreed ceiling.
Tracker mortgages
A tracker mortgage follows an external benchmark, usually the Bank of England base rate, so your repayments move in line with that rate. That’s the main difference between a variable and tracker mortgage.
For instance, if you take a tracker at base rate plus 1% and the base rate falls by 0.25%, then your rate falls by the same amount. However, repayments can rise just as quickly if the benchmark increases. Tracker periods typically last two to five years before the loan reverts to the lender's SVR, so it's smart to plan ahead for that transition and discuss timing with a trusted mortgage adviser.
Some lenders offer open mortgages that allow penalty-free overpayments, while some restrict them, so first check that the agreement matches your repayment plans.
Flexible mortgages
A flexible mortgage can blend features such as overpayments, underpayments and payment holidays, (depending on the lender) giving self-employed professionals or business owners room to match cash-flow peaks and troughs. They will usually attract a higher interest rate in return for flexibility however.
These flexible features are most common on variable-rate products. Keep in mind that fixed-rate deals may limit overpayments or charge early repayment fees.
With flexible mortgages, you can usually overpay without penalty, thereby shortening your term if income allows while still offering much-needed breathing space in leaner months. If you’re planning on using these flexible extras often, this could be the right product for you.
The main advantages of flexible mortgages are that you can adapt them easily to life changes. For example, you can repay lump sums at any time or clear them in full. Also, if you feel the need to move on to a fixed rate because your circumstances change, that is possible.
