Building society mortgages come in six different types, although a building society may offer just some of these or a combination of several mortgage types. Fixed, variable, and capped mortgages are offered by most building societies. Discounted, cash-back, and tracker mortgages may also be available.
A fixed mortgage is one in which the borrower pays a set monthly amount for the duration of the mortgage. Payments remain the same even if interest rates rise. The homeowner knows exactly how much to budget for. If interest rates fall, the payments remain the same. Someone with a fixed mortgage can end up paying more compared to what others are paying.
Variable mortgages have rates that increase and decrease. The monthly payments decrease if interest rates fall. Payments might also increase, however, making this kind of mortgage more difficult to budget for and potentially resulting in monthly payments that are too high.
Building society mortgages also include capped mortgages, which are a combination of a fixed and variable mortgage. Payments can rise until the the cap is reached, meaning they can never rise beyond a certain amount. The disadvantage is that payments can also be collared, which means that they cannot decrease below a certain amount. If mortgage rates remain high for a long period of time, payments may become greater than with a fixed mortgage since the cap is usually set higher than fixed rates.
Discounted rate mortgages offer the opportunity to pay a discounted rate for the first year or two of the mortgage, with the discount percentage usually higher during the first year than in the second year. For example, the discount rate for the first year might be 2% and 1% for the second year. With a variable interest rate of 5%, interest would be 3% the first year and 4% during the second year. This is one of the variable building society mortgages, so payments may increase or decrease over time. One of its biggest advantages is that it makes a mortgage more affordable during the first few years, but if interest rates rise, payments may increase as well.
Cash-back mortgages offer a lump sum to the borrower that is calculated according to the original amount of the mortgage. If a mortgage offers a 3% cash-back option, a client would receive a lump sum of $4,500 US dollars (USD) on a mortgage of $150,000 USD. This kind of mortgage could pay for renovations to the home or cover the costs of moving. This is one of the building society mortgages that has higher interest rates, and the lump sum cannot be used as a deposit.
A tracker mortgage is linked to independent rates, such as the Bank of England base rate or the London Interbank Offered Rate. When choosing this type of mortgage, repayments are linked to one of these rates for a set amount of time. The advantage is that someone could end up paying less when the linked rate falls, but when rates increase, the payments could be higher than with other mortgages.