3 Mortgage choices: offset, flexible, discounted/low start and portable mortgages?

The pros and cons of fixed-rate and variable rate mortgages have been looked at – the two basic categories of mortgage products. There are, though, further options you may be able to take advantage of to ensure the mortgage you choose meets your needs.

One option is that if you’re worried about your budget in the early years – which many first-time buyers in particular are - you could go for a discounted rate mortgage. In other countries they sometimes call this the ‘low start’ mortgage. Your interest rate and repayments start at a special low rate. The interest rate then goes up to the lender’s full rate - called its standard variable rate (or SVR) - so you need to make sure you will be able to afford the increased payments. You could look around then to see if you can switch to another low-cost deal.

But discounted rate mortgages usually have early repayment charges that extend beyond the discount period, so - once again - you’d have to weigh those up against the gain from switching.

Offset mortgages are interesting. If you have surplus cash - say in your current account or your savings account - you can move that to the mortgage lender, and it’s deducted from the amount you owe on your mortgage before the monthly mortgage interest is worked out. So if the interest rate received on the savings account is lower than that charged on the mortgage - which typically it is - this can be a good deal. In effect, your savings are earning interest at the mortgage rate. Usually, you can still draw your savings out - for example for a holiday or life’s uncertainties - then of course, the interest charged on the mortgage goes up.

The interest rate on an offset mortgage is usually a bit higher than other lenders would charge. Whether it’s a good deal really depends on the amount of savings you can offset. You might want to consider a flexible mortgage. A variable rate mortgage where you can choose to vary your monthly payments and sometimes borrow back money you’ve already paid off. Obviously being able to reduce your payments could be useful if you’re going through a tough time financially. But flexibility is good the other way too.

Most mortgages these days let you pay off extra if you want to. That means you pay off your mortgage faster and pay less interest in total. However, some people worry that, with the freedom to reduce payments in bad times, they won’t push their payments back up enough in the good times. Like when you’re on holiday, you don’t want to go back to work. With a fixed or variable rate mortgage, you pay whatever the lender tells you to pay each month - and that inflexibility is sometimes helpful, if you want to be disciplined about repaying.

And one other thing you need to check. Is your mortgage ‘portable’? This means if you sell up and move to a new property that you are buying you can take your existing mortgage with you to help finance your new purchase. This makes that next purchase simpler - although note that you may need a top up of an additional mortgage to meet the asking price. By contrast if your mortgage is not portable you would have to repay the existing mortgage on your current property and obtain an entirely new mortgage to enable you to complete on your new home.