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There are hundreds of mortgage products available on the market, and with so many providers offering different types of mortgage it can sometimes be difficult to grasp which deal would be the best for you. This easy to follow guide will give you an idea of the types of mortgage available. A mortgage is like any other kind of loan; you borrow money, and you pay it back with interest over a period of time. But it has one key difference: it's secured against your home. So if for any reason you can't repay it, the bank or building society can sell your home to recover their money.
If you are relatively new to mortgages read our guide and shop around to find a mortgage deal or call us on 01792 700036 and we can put you in touch with an Independent Mortgage Advisor who will scour the market to find the best mortgage product for you!
Types of Mortgage
The main issue to take into consideration when choosing a mortgage is what type of mortgage will suit you.
Repayment
Every month, your mortgage payments go towards reducing the amount you owe on the loan as well as paying the interest. Each month you're paying off a small part of your mortgage, this is the clearest and simplest type of mortgage repayment, however in the early years of the mortgage you will be paying mainly interest so if you are looking to pay off your mortgage early for any reason you may find that the loan amount hasn't decreased that much.
Interest Only
As the name suggests the monthly payments that you make to this type of mortgage only pays the interest charges on your loan not the actual loan itself. It is very important that you have the funds to pay off the loan once the term of the loan comes to an end through a savings/investment plan. If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up. For further information on what you can do to if you have a shortfall, look at the FSA Publication for guidance. This type of mortgage will make sure that your monthly payment will be lower but if you are unable to pay off the loan at the end of the term you could lose your home.
Interest Rate Structures
FIXED RATE MORTGAGES
This type of mortgage is where you and the mortgage lender agree to fix the interest rate owed on your loan for a set period of time. This way you know exactly what your monthly mortgage payment will be for first few years of the loan. The fixed period is usually between 1 and 5 years but could be longer depending on the total term of the mortgage. After the agreed period, the interest rate owed on your loan usually reverts to the lender's Variable Rate which is subject to the Bank of England base rate at the time.
In today's economic climate where interest rates have continued to rise many lenders are now retracting their fixed rate offers, but if you do get a fixed rate deal now remember if interest rates start to fall then you could end up paying more than you would if you chose a variable rate.
If you want to get out of the fixed rate deal before the end of the term then you will have to pay an early redemption penalty which could prove expensive, for example you could get charged 6 months gross interest if you leave a five year fixed rate agreement.
ALWAYS read the small print, there may be other penalties that are detailed here in particular check if there are any overhanging lock in fees (this is a fee that the lender could apply after the term of the fixed period, intended to encourage you to stay with them). Check with the mortgage advisor if you have ANY questions.
Shop around, then shop around some more! Or why not get some impartial advice from an independent mortgage advisor, contact the MonkeyMove.com team now and we can put you in touch with a local advisor.
VARIABLE RATE MORTGAGES
Mortgage lenders have what is known as a Standard Variable Rate (SVR) of interest on which it bases all of its mortgage deals. This rate is based on the Bank of England’s base lending rate which is decided at monthly intervals (so technically your rate could vary quite frequently). Base Rate will depend on the economic climate at the time and your variable mortgage rate will reflect this, when Base Rate rises, so will the standard rate (usually by the same amount) and when it lowers, so will your standard rate (again roughly by the same amount, but some lenders will not be so hasty to implement this fluctuation!)
The mortgage lender's interest rate is set higher than the base rate usually around 1% or 2% above it. (So if the base rate is 5.25% and your mortgage lender is charging you 2% above the base rate, you'll be paying 7.25% interest.)
There are usually far cheaper mortgage deals around such as discounted rate, and remember each mortgage lender has their own variable interest rate. They vary a great deal offering as much difference as 1%. It may not sound much but on a £100,000 loan that's £1000 per year! So shop around or get independent advice!
If you have quite poor credit history then the lender may increase the SVR considerably, their view is that they are taking a greater risk by lending in these circumstances. If you have a reasonable credit history then there is no reason why you should take out an expensive SVR mortgage.
Capped Rate
Capped rate mortgages are designed to offer the best of both variable and fixed rate deals. If the advantages of a variable rate mortgage attract you ie. reduced payments when interest rates fall; but you are worried about the risk of payments rocketing when interest rates rise, a capped mortgage could be what you are looking for.
You agree to have a limit (cap) on the maximum amount of interest you will pay over a particular period of time while allowing the rate to fall if the variable rate drops. A limit is set on how much your mortgage interest can increase, regardless of what the Bank of England's base rate is.
When you take out your mortgage, your lender provides you with two interest rates:
The interest rate you will pay to start with
The maximum interest rate (capped rate) you can be required to pay
Your starting interest rate will be based on your lender's standard variable rate at the time, and normally changes whenever the Bank of England changes their interest rates. So if rates go down, your rate will go down and if rates go up, your rate will go up. But only until it reaches your maximum (capped) rate. Once your capped rate has been reached, even if interest rates keep on going up, your interest rate will stay fixed. This is the one major advantage of capped rates.
• If the variable rate goes higher than your agreed capped rate then you're only paying up to the agreed capped rate. Wheras if it falls below your capped rate then you pay less as well.
There are a limited number of these deals on the market and they aren't considered to be very competitive because the interest rate you'll be paying is going to be higher than your average fixed or discounted rate mortgage.
You will typically have to pay an admin charge to the mortgage lender ranging between £95 to £200 - though this may not be much compared to the amount you might have paid if your mortgage wasn't capped and interest rates increased.
Shop around to see what deals are available or speak to an independent advisor.
DISCOUNTED VARIABLE RATES
To attract new business most lenders will offer a new borrower a discount on their standard variable rate, for a set period of time. Your payments will go up and down, as with a standard variable mortgage, but you will pay less interest during the interim period. After the agreed set period the interest rate will switch into the mortgage lender's usual variable rate.
If you are thinking of switching or selling the early redemption penalties may still be due after the agreed discounted term.
You are locked in to the agreement for the term of the discount so the shorter the term the better, 2 years tie in is the generally best term.
These types of mortgages are in basic terms fixes or discounts so decide which one would be best for you and start shopping around or see an independent mortgage advisor.
If you can't afford to have your payments increase, or you believe interest rates will rise, you might be best to choose a fix. If you can afford to take the risk that your payment will rise, or you think rates are going to fall, you might prefer a discount.
Within all of these categories of mortgage there are a lot of other subcategories, these are listed in our mortgage glossary.
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