Repayment Mortgage Options

Note: Confused by the number of repayment mortgage options that are available? If you want to save money on your mortgage, it's vital to get the right deal. This article looks at the advantages and disadvantages of different repayment mortgages.

Discount rate

This type of mortgage is just a normal variable rate deal set at an agreed discount to the lender’s standard variable rate. If the lender’s standard variable rate is set at 5.95%, a 1.5% discount mortgage would cost 4.45%. These discounts typically last from 6 months to 5 years. The shorter the discount period is, the greater the discount will be. Once the discount period ends, the mortgage rate will usually return to the lender’s standard variable rate. This will almost always be at a substantially higher rate.

A discount rate is a good option for those who need the repayments to be lower during the initial stages of the loan (e.g. first time buyers). This type of product is also ideal for those who like to play the system, surfing from one discount rate to another. But if you intend to do this, make sure you keep an eye on the redemption penalties.

These are additional interest payments that are charged to discourage customers from jumping ship as soon as they find a better deal elsewhere. These penalties will normally last for as long as the discount period, but will often last even longer (so called overhang penalties).

To avoid them, it may be best to wait until the penalty period has expired before moving to the next deal. For this reason, when you accept a new discount deal, make sure that the redemption penalty period doesn’t last longer than the length of the discount period (otherwise you’ll be ‘tied in’ to the lender’s standard variable rate which will be much higher). If you want to save money, it's extremely important to avoid mortgage redemption penalties.

Fixed rate

If you like to budget and know how much your mortgage payments will be, this is the type of mortgage for you. A fixed rate deal is set at an agreed rate of interest for an agreed period. Once the agreed period ends the rate will return to the lender’s standard variable rate. Once again redemption penalties are likely to apply.

A fixed rate is good for those who are on a tight budget and those who don’t want to concern themselves with the changing base rate. It can also be used by those who believe that interest rates will increase in the future. This can save you money, but if rates fall it means that you’ll be paying more than you should be. In short, it’s gambling on what interest rates will do in the future.

Next: Offset Mortgages

Previous: Select The Right Mortgage Type Of Mortgage

  Del.icio.us      Digg      Newsvine      Reddit