Types of Mortgages
When it comes to getting a mortgage, everyone will have different requirements and therefore, there is not one mortgage type that suits all.
There are many different types of mortgages and we have listed them all below so you can decide which one is best suited to your personal situation.
This is the most common type of mortgage, where you pay back a percentage of what you borrowed with interest added on each month. The time it takes for a mortgage to be paid back is usually around 25 years and by then, the house will be owned outrightly by you. Depending on what product you choose, the interest rate can vary each month so you may not be paying the same amount each time.
Interest Only Mortgages
In contrast to a repayment mortgage, an interest-only mortgage does what the name suggests. You only pay the interest amount monthly and then you pay back the money you borrowed initially at the end of the mortgage term. Although this type of mortgage means your monthly repayments will be lower, you will have to make sure you can afford to pay the lump sum at the end, something that lenders can ask you to prove before they accept you. If you can’t afford the repayments, then you may have to sell the house to pay off the mortgage. If you’re lucky, the house would have increased enough in value, so the extra cost can be used to remortgage and pay off the existing debt.
Fixed Rate Mortgages
If the idea of varying interest rates each month puts you off, then a fixed rate mortgage may be the best option for you. The interest rate is fixed for a certain period of time, usually 2-6 years (sometimes more) even if the interest rates go up or down, which makes it a great option for first-time buyers. However, this means if the interest rates do go down, you would be paying a higher rate than you need to because your rate is fixed. When the fixed rate period ends, you will be put onto a standard variable rate (SVR) that is decided by the lender, which could have higher rates than you were paying previously.
Variable Rate Mortgages
When you’re dealing with a lender, they will offer you a standard variable rate mortgage. This is where your interest rate will usually depend on the interest rates being set elsewhere, such as the Bank of England base rate. However, lenders don’t necessarily see this as gospel. They will most likely use the base rate as a guide and then set their own rates individually. There is a minimum that the rate can reduce to, but there is no maximum rate it can rise to.
As the name suggests, this type of mortgage tracks the Bank of England base rate and the actual rate you’ll pay on your mortgage will be set either above or below the base rate. When the base rate increases, so will your mortgage rate and vice versa. If you’re confident mortgage rates will go down, then this may be a good option, but you also need to be prepared for increasing mortgage rates. This is not the best option if you like to know exactly how much you owe each month. For example if the Bank of England Base Rate is 0.75%, the lender may apply a rate of 1.25% on top. This means your interest rate would be 2%. If the base rate increased to 1%, your interest rate would increase to 2.25%.
Discounted Rate Mortgages
As one of the cheapest mortgages on the market, discounted rates are desirable because of their set reduction on certain interest rates, most commonly, the lenders SVR. The fact that the reduction amount is fixed, means the interest rate can go up or down. Discounted rate mortgages are usually only available for a certain length of time, which is usually 2-5 years. However, some lenders may offer you a lifetime discounted rate that will cover the entire term of your mortgage.
Capped Rate Mortgages
If the idea that there was no maximum rate on a variable rate mortgage put you off, then capped rate mortgages may be more suitable for you. Capped rate mortgages are the same as a variable rate, but they have a maximum rate that the interest can climb to. Therefore, it is a safer option to consider. It’s worth bearing in mind that recent mortgage rates have been particularly low, so not many lenders tend to offer capped rate mortgages at the minute.
Cashback mortgages are considered more of a selling technique for a lender, as when you take out a mortgage with them, they give you a percentage of the loan back. It sounds great on the surface, but lenders who offer cashback mortgages usually have high-interest rates and other fees – so you should do your research first.
This type of mortgage is based on your savings. A lender will look at how much you owe on the mortgage and then deduct the amount you have in your savings from the mortgage amount. So, if the mortgage was £200,000 and you had £15,000 worth of savings, then the lender would calculate your rate by subtracting the savings from the amount you originally borrowed (£200,000 – £15,000 = £185,000) The interest rate will then be calculated on £185,000, which may make it cheaper than it would have been originally. However, the mortgage rate is likely to be higher than average.
This type of mortgage is determined by how much you can put towards a deposit. 95% mortgages are for those who can only afford a smaller deposit of around 5%. However, because of your small deposit, you have a higher risk of falling into negative equity and suddenly, your house may be worth less than your mortgage, therefore lenders tend to charge a higher rate to compensate for the risk of going into negative equity.
A good option to go for if you want a bit of allowance on your monthly repayments. If you decide you are in a comfortable financial position, you can pay more towards your mortgage that particular month. Then if you hit a rocky patch financially, because you have paid more in previous months, you can pay less during another month if it’s necessary. However, this flexibility means your mortgage rate may be higher than average.
First-time Buyer Mortgages
Being a first-time buyer usually means you will have a smaller deposit somewhere around the minimum of 5%. Some lenders consider first-time buyers as too much of a risk, so taking your first steps on the property ladder can be quite difficult. However, the government have recently recognised this and have introduced the ‘’Help to Buy’’ scheme, where they will lend you up to 20% of the cost of your house (which has to be a new build). This means you’ll only have to pay a 5% deposit and a mortgage will make up the remaining 75%. You don’t pay any interest on the 20% loaned by the government for the first five years and in the sixth years you will be charged 1.75% interest. The 20% equity loan is then paid off fully when you move house or remortgage.
Buy To Let Mortgages
Buy to let mortgages are specifically designed for people buying a home for the purpose of letting it out, rather than choosing to live in the house themselves. The amount you borrow is calculated on the rent you are forecast to receive and a lender will usually do some research to ensure this forecast is accurate.
Some buy to let mortgages are not regulated by the Financial Conduct Authority.
Do your research…
Not all lenders will offer every type of mortgage and some will specialise in specific ones. Therefore, it’s imperative you do extensive research to make sure you are entering a deal that is right for you. A mortgage is a huge financial commitment and is probably the biggest one you will make in your lifetime, so it’s important you don’t rush into anything.