What are the different types of mortgages?
What are the different types of mortgages?
When you are talking to your mortgage broker about the type of mortgage you are after, picking one based on the monthly payments may be a very poor decision, here we give an overview as to the types of mortgages available. Some of these can be used in conjunction with help to buy schemes but always check and note that whilst lenders will offer the same type of mortgage the features of that mortgage may be different, such as, when they charge interest, redemption charges etc, the advice I would give is to shop around and listen to advice.
Here goes.
What is a Mortgage?
A mortgage is a loan to buy property, how that mortgage is structured is up to the lender, they can offer
- Different ways to repay the mortgage
- Different time frames for the mortgage
- Different interest rates
or as many variables as they like, luckily there are only about a dozen core types of mortgage loans.
What are the different types of mortgage?
There are some specialist mortgages available and your broker may recommend something that is not on the list but 99.5% of you will be offered a type of mortgage on this list and sometimes you will be offered combination mortgages, for example, a fixed rate interest only mortgage, or the discounted first-time buyers mortgage
- 100% mortgages
- Buy to let mortgages.
- Capped rate mortgages
- Discounted rate mortgages
- Fixed rate mortgages
- Flexible mortgages
- Interest only mortgages
- Offset mortgages
- Capital and interest repayment mortgages
- Tracker mortgages
- Variable rate mortgages
Within this list there are only really two types of Mortgage, the rest are versions of the two main ones, Repayment Mortgage and Interest Only Mortgage so we will look at those first.
What are Capital and Interest repayment mortgages?
Going back decades this would probably have been the only type of mortgage available with the Capital and interest repayment mortgage you borrow an amount of money and you pay it back over a period of time, normally 25 years but it does not have to be.
Your payment each month is made up from part payment for interest and part repayment of the capital borrowed.
It’s quite normal that at the start of the mortgage term your repayment is made up almost all of interest and hardly any capital repayment and at the end this is reversed where your payment is almost all repayment of capital, that can catch some people out as they wonder why after 7 years their mortgage has not gone down much, think about it this way;
day one you borrow £50,000 if interest is charged on that amount how much it will be + a bit of capital repayment, so as time has gone on your mortgage starts to be paid off ever so slightly, but your monthly payment stays the same, after 5 years your monthly payment is the same but your mortgage has reduced to £45,000 so the proportion of your payment that is used to repay the interest is less, therefore, more goes towards repaying the capital.
with a capital and interest mortgage at the end of the agreed term, your mortgage is repaid.
Interest only mortgages.
With an interest-only mortgage, you pay the interest off each month never the capital; the capital is repaid from another source at the end of the term of the mortgage.
Interest only mortgages are popular because the monthly payment is lower than that of a repayment mortgage but overall it can be a lot more expensive; because the debt is not reducing you are accumulating interests on the full mortgage.
Would you like a fixed rate or capped rate to go with your interest only mortgage?
So now you understand the two types of mortgage, it is then a choice as to what features you would like for the mortgage.
If you like you can have combinations of the two types of mortgage, half on repayment and half on interest only.
Fixed Rate Mortgages.
Fixed Rate mortgages are excellent if you want to budget and if knowing exactly what you are paying each month is important to you, lenders normally offer terms from 2 years fixed to 10 years fixed, at the end of the fixed rate period you will normally be placed on the lender's standard variable rate.
Fixed rates can be a gamble if you have had a fixed rate over the last 5 years you would have paid more than someone that went for a discounted rate if you had taken a 5 year fixed 15 years ago you would have done very well.
At this moment the speculation is that interest rates will go up, by how much and when is guesswork but fixed rates in a rising interest rate market are popular.
Variable rate mortgages
The Standard variable rate mortgage is normally linked to the Bank of England interest rate, I, therefore, can’t see much benefit in taking a SVR mortgage at the moment unless you are thinking of paying it off in a very short period and do not want any potential penalties.
Tracker mortgages.
Tracker mortgages move when a designated interest rate moves, which is normally the Bank of England base rate.
For example, if the Bank of England rate is 0.5% and you have a tracker rate 2% higher you pay 2.5% and if it moves so do you.
A lenders SVR mortgage normally moves when there is a change of interest rate but not all changes are passed on to account holders, any rises are normally passed on the same day, any falls not so quickly, if at all.
The Tracker normally applies to the whole term of the mortgage.
Discount Rate mortgages
Normally a discount against a lenders standard variable rate of interest and will last for a designated period of time, 2-5 years is standard, these normally provide the borrower with the lowest monthly repayment, to begin with.
When the discount term expires you will be able to remortgage or renegotiate with your existing lender.
Capped rate mortgages
Great if you are concerned about mortgages going up but want to take advantage if interest rates fall, put a cap on it!
If the standard interest rate, for example, is 3% your cap is set at 4% if interest rates go to 5% yours won’t, you stay at 4% but if they fall so do your payments.
Currently, these are quite rare, and because they are, the rates are not all that attractive.