Types of Mortgage

Interest Only

Your monthly repayments to the lender only pay off the interest on the loan (i.e. they do not repay any of the capital).  To repay the loan at the end of the term you will need to invest additional funds in investments designed to generate sufficient funds to pay off the capital and hopefully leave you with a surplus.  Unlike a repayment mortgage the debt does not reduce over time and there is no guarantee that your investments will grow sufficiently to repay your loan.

Repayment/Capital and Interest

This traditional type of mortgage remains popular as the loan is actually guaranteed to be repaid at the end of the term because your monthly repayments cover both capital and interest.  However, the mortgage will only be guaranteed to be repaid providing that the monthly payments have been made in full and on time.  Lenders can request that you have life insurance to ensure that the loan is repaid to them in the event of you dying before the end of the mortgage term. 

Buy to Let/Investment Mortgage

This is a home loan to buy an investment property.  There are various buy to let mortgages on the market, ranging from special offer deals to flexible and variable rate loans.  You will need to ensure that your rental income exceeds your mortgage repayment by a set percentage and that the property is seen as a good long term investment.  A buy to let mortgage is not regulated by the Financial Services Authority.

Equity Release Mortgage

Equity is the difference between any mortgage you may have and the value of your home. Equity release is a way of unlocking the cash tied up in your property, without having to move home, to provide a lump sum or a regular income (or both). It is used by mostly older home owners who either have paid off their mortgage altogether or have only a small amount left to pay.

Equity can be released in two main ways:

•  Taking out a special type of loan, usually designed to run the rest of your life. Early repayment of the loan may result in a redemption penalty.

•  Selling your home (or part of it) to a reversion company that allows you to continue to live there the rest of your lives. Once you have sold all or part of your home to a reversion company you cannot change your mind.

Products

Tracker Mortgages

Tracker mortgages are basically variable rate deals, but instead of the interest rate you pay being based on your chosen lender’s standard variable rate (SVR) it is usually linked to the Bank of England base rate.  The interest rate you pay is a set margin above, or below, the rate that is being tracked and it changes as the rate moves.  There may be initial fees from the lender to set up this type of mortgage and redemption penalties if the loan is redeemed within a certain period of time.

Fixed Rate Mortgages

A Fixed Rate Mortgage fixes your monthly repayments for a set period of time – usually between 1 and 5 years.  At the end of this time your mortgage will revert to the lender’s SVR.  The advantage of this type of loan is that you know exactly what your mortgage will cost you in the early years.  Be aware that these loans can sometimes carry early redemption penalties, which could lock you in to a loan with an uncompetitive SVR.

Flexible/Offset Mortgages/Bank Account Mortgages

This type of mortgage will allow you to be flexible with your payments i.e. you can pay more or less than the agreed monthly amount, make additional payments, take a payment holiday, or borrow back on payments already made.  Good financial management is needed with this type of product to ensure that the overall level of borrowings reduces.

Self-Cert Mortgages

These types of mortgage are for borrowers who have problems proving how much they earn i.e. self-employed.  Lenders usually require a deposit from around 15% upwards and charge a slightly higher interest rate.

Adverse Credit

A poor credit history (i.e. mortgage arrears, late payments, bankruptcy or CCJ’s) can often be a barrier when obtaining a mortgage but there are specialist lenders who offer loans tailored to your specific circumstances.  These types of mortgage will often be more expensive than a traditional loan through a high street lender as the risk in lending is high.

100% Mortgages

100% mortgages cover the full value of the property without the need to put down a deposit and are usually taken out by first time buyers and couples who have separated.  As the risk to the lender is high, strict income checks and high credit score ratings are usually necessary.  These traditionally have a higher interest rate and have substantial “mortgage indemnity guarantee premiums”.

Discounted Variable Rates

Many lenders offer a new borrower reduced expenses in the early years by setting the interest rate below their Standard Variable Rate (SVR) for a set period.  When this period had ended the loan reverts to the lenders SVR so it is worth checking their track record to make sure you will not end up paying far too much.  There may be initial fees from the lender to set up this type of mortgage and also redemption penalites if the loan is redeemed within a certain period of time.

Capped Rate Mortgage

Loans like this usually means you get the best of both variable and fixed rate deals as you have a fixed ceiling on the interest rate for a set period of time.  The advantage of this type of mortgage is that if the base rate falls your repayment can reduce.  At the end of the capped rate period, the interest rate reverts back to the lenders standard variable rate.  There may be initial fees from the lender to set up this type of mortgage and redemption penalties if the loan is redeemed within a certain period of time.

Cashback Deals

A cashback mortgage is a loan where the lender rebates a stated cash lump sum or percentage of the capital borrowed upon completion and is attractive to borrowers who might need some extra cash to help with the many incidental expenses of buying a property.  These types of loans are used to tie you in to the mortgage lender so that they can recover the additional lump sum and there may be redemption penalites if the loan is redeemed within a certain period of time.