Types Of Mortgage
What is a Mortgage?
A 'mortgage' is a loan, usually from a bank or building society, secured against a property. 'Secured' means that if you do not keep up the payments, the lender can sell your property to get its money back.
Remember: Your home may be repossessed if you do not keep up repayments on your mortgage. Always speak to your lender if you have difficulties making your payments. Don't ignore them!
(also called a capital-and interest loan)
Your monthly payments gradually pay off the amount you owe (capital) as well as paying the interest charged on the loan. Provided you make all the agreed payments, the loan will be fully paid off by the end of the mortgage term You will pay more interest in the early days than capital.
Your monthly payments are only covering the interest on the loan. you will not be paying off any of the capital. You can arrange to pay separately into a savings or investment scheme to build up a lump sum if you wish to be able to pay off the mortgage at the end of the term. It is your responsibility to make sure you have enough money to repay the mortgage at the end of the term.
Combined Mortgage and Current / Savings Account - (Offset Mortgage)
Your mortgage is combined with your current/savings account. You get a chequebook, direct debit facility, credit & cash card and regular statements etc. Your earnings are paid straight into this "mortgage/bank account". Basically any money in your current/savings account is offset against your mortgage so therefore in theory you pay less interest on your mortgage, effectively saving you money, however you do not earn interest on your current/savings account so higher earners/savers may benefit more from this type of product. There are also dangers with this type of account as you can draw money down against your mortgage at anytime, so unless you are careful with your money you could be inadvertently topping up your mortgage and accruing more debts. This type of mortgage is particularly suitable in times of low interest rates and also for higher rate tax payers.
Buy to Let Mortgage
This mortgage is designed for those who are buying a property that is going to be rented out.
Capped Rate Mortgage
Capped rate mortgages are a combination of both a variable and fixed rate deal. Your rate may rise and fall with rate changes. However it will have an agreed upper limit so you know you will never pay more than a set interest rate. These products are not generally popular with lenders these days so the deals available are limited.
Discounted Variable Rates
The lender offers a discount off their standard variable rate (SVR), for a set period. Your payments are variable so can go up and down, as with a standard variable rate. There will be an initial set period where you are getting a discount. After the agreed set period the interest rate will switch back to the SVR. Generally you will be tied in for the discount period although sometimes longer. Many lenders will impose a financial penalty if you wish to change lenders during this tie in period.
Base Rate Tracker Mortgage - (tracker)
A mortgage that tracks the Bank of England Base Rate, some track below this rate, some track above for a specified period, sometimes the whole of the mortgage term.
Fixed Rate Mortgages
A mortgage that has a fixed rate, for a set period of time, for example 2, 3 or 5 years, or in some cases the term of the mortgage. You will generally be tied in for the fixed period and are likely to pay lender fees to obtain a competitive rate. Your rate and payments will stay the same,not go up or down during this period.
This type of mortgage allows you to make overpayments and underpayments without penalty. Your interest is calculated on a daily basis therefore any overpayments will have an immediate effect. A truly flexible deal will also allow you to borrow back any overpayments that have been made. This type of product if used properly can be a very effective way to save money on interest. Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate some forms of buy-to-let mortgages.
Your home may be repossessed if you do not keep up repayment.