Different Types of Mortgages
Different types of mortgages
A number of factors are going to help decide the type of mortgage that suits you best, including your current financial circumstances and the specific lender you approach.
By researching, you’ll get a good idea of your options before committing, which can secure the right deal on the right mortgage.
Take a look at some of the most common mortgage types available to you:
With a repayment mortgage, it’s nice and straightforward. You make pre-agreed repayments each month which include a part of the amount loaned, along with some interest on top.
The amount you repay is set so that, by the end of the mortgage’s term, you’ll typically have cleared the whole amount and own your home.
To achieve this, you’ve got two main options; fixed-rate and variable-rate mortgages.
Some mortgages are ‘fixed-rate,’ with the ‘rate’ referring to the interest charged on the loan (as set by the Bank of England).
With these mortgages, the rates you pay are fixed for a period of time, usually 2-5 years, regardless of what happens to the interest rate for other borrowers.
This comes with the big advantage of knowing exactly how much you’ll be paying for that entire period of time. There’ll be no nasty surprises if the interest rate were to suddenly shoot up; you can plan ahead so you’re sure you can make repayments.
On the other hand, falling interest rates wouldn’t lower your repayments either. You’re locked into the agreed payments and might actually be charged for leaving early by paying off too much at a time.
Overall, the amount you repay each month on a fixed-rate mortgage could work out higher.
In contrast to a fixed-rate mortgage, the interest you pay on a variable-rate mortgage (you guessed it) varies from month to month, depending on the Bank of England’s base rate.
A number of types of these mortgages exist:
Standard variable rate (SVR) mortgages charge a rate of interest as set by the Bank of England, which goes up and down, so your mortgage will change in line with everyone else with an SVR.
With these deals – in common with some fixed-rate mortgages – most lenders should allow you to overpay by around 10% each month if you can, to pay the loan off quicker. You could also be eligible to leave without a penalty.
On the other hand, you’ll typically be paying a different amount each month, making finances harder to plan, as well as being subject to the ups and downs of the Bank of England’s base rate.
Discount mortgages are similar to the SVR variety, but offer a discounted base rate for a pre-agreed period, typically two or three years.
Like SVR, you’re at the mercy of fluctuating base rates, but you’ll be paying below the odds for that introductory period.
Tracker mortgages are, again, very much like SVR, but they’re locked in step with the base rate, plus a few percent on top.
So once more, you’re paying more if the base rate rises and less if it falls. The difference here is that you could also be subject to early repayment charges if you clear the balance too soon. This can be the case with all mortgages, but it bears repeating here.
become available when you have a savings account from the same bank you take out your mortgage loan with.
Your total savings reduce the interest charged on your mortgage. The amount gets calculated by subtracting your savings from your total mortgage, then working out interest based on this new figure.
For example, say your total mortgage is £100,000, and you have £10,000 saved. You’d take the savings from the mortgage, and only pay interest on the new figure of £90,000.
Not all mortgages have you make regular repayments on the actual sum borrowed. An interest-only mortgage only asks you to pay the monthly interest on the amount you owe.
The full balance isn’t due until the end of the term, at which point you’d need to pay it off in full. Because you’re only making payments on the interest, not the balance itself, this isn’t a repayment mortgage.
If it all sounds risky to you, you’re not alone. Interest-only mortgages are becoming less and less common due to the risk of borrowers being saddled with enormous debt by the end of the term, unless they have an ISA, pension, or similar means of repayment. However, they are still available from some lenders.