Getting the right mortgage can be a confusing, if not a scary process and whether you’re applying for one the first time or planning for a remortgage, the different types of mortgages available make it harder to decide on the right one.
The first step to figuring out the right mortgage for you is to understand the different types of mortgages that are available. The second step is to narrow down to a couple of options that seem suitable and enquire about them.
Types of Mortgages explained
There are different types of mortgages, including:
- Repayment Mortgages
- Interest-Only Mortgages
- Fixed Rate Mortgage
- Variable Rate Mortgage
- Tracker Mortgage
- Discounted Rate Mortgage
- Capped Rate Mortgage
- Cashback Mortgages
- Offset Mortgages
- Flexible Mortgages
- 95% Mortgages
- Buy to Let Mortgages
- First Time Buyer Mortgages
This is the most common way of repaying back a mortgage. Each month you will pay back some of the capital and some of the interest that you owe. At the end of the mortgage term, you will have paid back the full mortgage amount and thus, will own your house outright.
With interest only mortgages, you will pay back only the interest you owe each month. At the end of the term, you will still owe the total amount that you originally borrowed (the capital).
You will have to find a way to repay this whether it be savings, inheritance or selling the house and downsizing.
Lenders will want to know your repayment method upfront before they will offer you an interest-only mortgage.
Fixed Rate Mortgage
With fixed rate mortgages, your interest rate and monthly repayments will be fixed for a certain amount of time. This will mean you will know exactly how much you are paying each month for the term of the fixed rate.
This would mean however, that your interest rate will stay the same even if other rates go down.
Also, to leave a fixed rate mortgage before the term ends, you will incur an early repayment charge.
Variable Rate Mortgage
Standard variable rate mortgages are offered by most lenders. It is entirely up to the lender as to what changes are made to the rate and when. Some will take the Bank of England Base Rate into consideration whilst others will not.
Your monthly mortgage repayments are most likely to fluctuate whilst being on a variable rate unlike those on a fixed rate for example meaning your mortgage repayments could be different each month.
The rate you will pay is entirely dependent on your mortgage lender, with changes to it not necessarily being affected by the Bank of England Base Rate.
A tracker mortgage is dependent on the Bank of England Base Rate, meaning when this fluctuates, your monthly repayments will also change accordingly.
The interest payable on a tracker mortgage is usually a certain margin above the Bank of England Base Rate – for example the Base Rate plus 1.00% with some trackers having a “floor” of which the rate will not fall below.
Discounted Rate Mortgage
Discounted rate mortgages are based on the lender’s standard variable rate with a reduced amount. They can often be low interest rates however they will fluctuate in line with the standard variable rate meaning if that increases, so will the discounted rate.
Capped Rate Mortgage
A capped rate mortgage is a variable rate that will never exceed a certain interest rate.
You will know that your monthly repayments will never exceed a certain amount however when interest rates fall, you will still benefit from it.
Due to the current low interest rates, capped rate mortgages are rare at the moment.
Cashback mortgages offer an incentive of money back upfront once you take out the loan. This is often a certain percentage of the total loan amount.
It is worth noting the interest rate and fees being charged on these types of mortgages as often you can find a better mortgage without cashback.
Offset mortgages are linked to saving accounts. You will pay interest on the different between the outstanding mortgage balance and the amount of savings in your account. For example, if you owe £200,000 in total and you have £50,000 in savings, your interest rate for that month will be calculated on £150,000.
You are still able to access and use your savings however the more to offset, the faster the mortgage will be repaid.
You will not gain any interest on savings in an offset account but you will not have to pay tax on them either.
Flexible mortgages allow you more options with repaying back the loan. You are able to pay more than your regular monthly amounts when you are able to. There are also options to overpay and as a result, take payment holidays or pay less in future months.
Due to this lenience, these mortgages are user higher in interest rate.
These mortgages are for people with only a 5% deposit. Because of the risk of negative equity (owing more than your property is worth, for example if house prices drop), 95% loan to value mortgages are charged at a higher interest rate.
First Time Buyer Mortgages
First time buyers are able to have any of the above mortgages, providing they meet the lender’s criteria.
Government Help to Buy Schemes are also available to help First Time Buyers purchase their first home.
Buy to Let Mortgages
A buy to let property is a property investment of which you rent out for profit. A buy to let mortgage would be secured against a property of this sort.
A buy to let mortgage is assessed differently in comparison to a residential mortgage. It is mostly based on the profitability of the property i.e. how much rent can be generated from it.
Buy to Let interest rates tend to be higher than residential mortgages and the associated fees such as conveyancing are too.
Buy to let mortgages are not regulated by the Financial Conduct Authority.
Are one or two of the above types jumping out at you? It’s time to enquire about them.
At Mortgage-Wise, we specialise in remortgages and we would love to hear from you. Call us at 0333 207 0522 (lines open Mon-Fri, 9:00-19:45) or fill out our callback form to speak with our expert advisers here.