Let’s cut through the jargon and explain simply and concisely the different types of mortgages available.
There are basically two main types.
A Repayment MortgageWhere a monthly amount is paid over the life of the mortgage to cover the original loan amount and the interest due. There are no other payments needed unless the lender insists on life insurance to protect the loan (in case you were to die before it is repaid).
An Interest Only MortgageWhich by its very name means that your monthly payments cover the interest on the loan only and the full amount will still be outstanding at the end of the mortgage term. Usually an investment is designed to create enough capital to fully repay the loan at the end of the term. However there is never a guarantee of this and it is important to review this investment’s performance and payments regularly. Other common terms
Portable MortgageMany mortgages now allow you to move house without having to take out a new mortgage, hence being ‘portable’.
Offset MortgageAllows you to offset savings/current account against the outstanding balance on your mortgage with the same lender so you only pay interest on the net balance of the accounts.
Help To Buy MortgagesThe Government can offer assistance for first time buyers by either providing a short term loan to buy a new house or by guaranteeing a mortgage if you have a smaller deposit.
Early OverpaymentsMany mortgages allow you to make overpayments which will allow you repay the mortgage earlier and thus reduce the interest paid. There may be restrictions in the amount you can overpay but the lender keeps these separately so they can be returned either as a lump sum or to help subsequent monthly payments.
Early Repayment ChargesIf you manage to repay your mortgage early, especially during a fixed rate period, you may be required to pay a fee. This is usually a percentage of the loan.
Shared OwnershipUsually run by housing associations which then retain a share of the property. The borrower purchases the remaining share and ‘rents’ the housing association’s share keeping costs lower. The borrower then has the right to buy the housing association’s share at a later date.
Arrangement FeeLenders charge arrangement or booking fees to set up your mortgage. Typically these will be higher for lower interest products and vice-versa. The fee can usually be added onto the loan although you will then pay interest on this additional amount.
Loan to ValueLenders decide upon the rate they will offer based on the loan to value ratio. This is the percentage of the house value you are borrowing. Eg: If you have a 10% deposit, you are borrowing 90% of the house value hence 90% loan to value.
Interestthere are a number of ways lenders fix interest rates and we are able to advise you on which will be the most suitable for you.
Standard Variable Rate (SVR)Each lender will have a SVR. This is typically influenced by the Bank of England base rate and will move up and down with the economy. This is the most straightforward option and is usually the interest rate at the end of an introductory offer
Fixed RateThe rate is ‘fixed’, as the term suggests, for an agreed period of time. This protects the borrower from increases in interest rates but remains the same even if interest rates drop. It sets the monthly payments over the early years of a mortgage, usually for between two and five years, before reverting to the lender’s SVR.
Tracker RatesThese rates are an agreed percentage above the Bank of England base rate. It is not linked to the lender’s SVR and changes are immediate if the base rate alters.
Capped RatesThese rates are part variable and part fixed rate. The rate can change in line with the Bank of England base rate or lender’s SVR but cannot exceed a set higher rate (the cap) or fall below a lower rate (the collar).
Discounted RatesA lender will often offer a discount on either a tracker or SVR mortgage for a specific period (such as 12 months) after which the rate reverts to either the tracker or SVR rate.