What different types are there?
Although there are many different types of mortgages on the market, generally they can be split into two basic types:
- Repayment mortgage
Under these arrangements you are required to make monthly payments which are made up of part capital and part interest. The structure of the repayment method normally means that during the early years of the mortgage, little capital is repaid. The rate of repayment accelerates over time.
Repayment mortgages are normally quite flexible and it is sometimes possible to extend the term of the loan but only with the written permission of the lender. Also, it is normally possible to increase the capital repayment of the loan so decreasing the term, allowing you to repay your debt early.
- Interest only
These arrangements do not require that you make capital repayments until the end of the loan. The monthly payments to the lender are made up entirely of interest on your outstanding debt.
In order to repay that debt then normally you would use an additional savings vehicle. One that enables you to build a fund of money from which you can clear the mortgage at the end of the agreed term. The lender may also expect you to have sufficient life assurance cover to enable your next of kin to repay the debt if you die during the term of the mortgage.
Please note that the above method is not guaranteed to repay your mortgage at the end of the mortgage term.
Further differences occur in the way interest is calculated on your mortgage:
The interest rate you pay rises and falls in line with the Bank of England’s base rate, but it may also have a ‘collar’, i.e. it will not fall below a certain rate.
The interest rate is fixed for a given time at the start of your mortgage normally from 1 to 5 years although this can be longer.
The lender gives you a discount on its standard variable rate for a given time.
The interest rate is guaranteed not to rise above a certain percentage, but it may also have a ‘collar’, i.e. it will not fall below a certain rate. However, there is normally a fixed timescale for the capped rate period.
Some lenders offer you the option to increase or decrease your monthly payments (and sometimes even the opportunity to stop them altogether for specified periods). This flexibility is designed to assist you to manage your cash flow. Many flexible mortgages offer daily or monthly calculation of interest, and when compared with a more traditional mortgage could reduce the overall amount of interest you pay throughout the loan term.
A mortgage that combines current, savings and mortgage accounts under one arrangement. The mortgage element will still be a repayment, interest only or flexible loan, but the amount of money in your current and/or savings accounts are taken into account and considered when the lender calculates the interest due on your mortgage.
For example if you hold a savings account with a balance of £1,000, this amount will be considered by the lender when calculating the interest due by effectively reducing the total mortgage by an amount equal to your savings.
- Standard Variable Rate (SVR)
The interest rate you pay rises and falls in line with the Bank of England’s base rate. With a standard variable rate mortgage your interest payments are likely to rise or fall every time there is a change in the Bank of England’s base rate. However, your lender may not pass on the change in base rate immediately. This can be to your disadvantage if the Bank of England base rate falls but the interest rate you are paying doesn’t.
Different lenders will offer you different incentives to take out a mortgage with them, for example:
On completion of your mortgage, you receive back in cash a payment of some or all fees: the lender pays for your survey, or your legal fees, or will meet the stamp duty charges. The cash back could be paid as either a percentage of the mortgage amount or as a lump sum.
Some lenders will charge you a penalty if you redeem your mortgage early, or want to pay off a part of it.
Please note where immediate offers such as these are provided it is common for lenders to charge you a penalty should you repay your mortgage during the early years of its term.
For more information see: http://www.chancerymortgage.co.uk/topics/60-mortgages