The very word has the non-financial savvy among us running for cover. Mortgage…it even sounds complicated.
But it needn’t be that difficult. Although the rates and the lender may vary, the actual types of mortgages available remain the same pretty much wherever you go.
While the list does go on a bit – there’s buy-to-let, right-to-buy, offset, self-cert…there are three main types of mortgage – repayment, interest-only and endowment – and two different types of mortgage deal – variable-rate or fixed-rate.
This useful guide should give you a good understanding of the basics:
1. Repayment Mortgage
A homeowner with a repayment mortgage will pay back both the capital amount borrowed as well as the accrued interest in their monthly payments. What this means is that the amount borrowed gradually decreases and at the end of the loan term the total amount borrowed plus interest will have been repaid in full.
2. Interest-only Mortgage
Unlike the repayment mortgage, with this type of loan you only pay back the interest, but not the capital. At the same time as you are repaying the interest, you are also paying into a separate repayment policy, such as an endowment policy, an ISA or a pension plan.
This is the most common type of interest-only mortgage – the lender pays only the interest with the actual capital being repaid by an endowment policy at the end of the mortgage term. At the end of the term, the hope is that there is sufficient money in the policy to pay off the final lump sum of the mortgage.
The more money-savvy among us are looking to their ISAs as a means of saving to pay off the final lump sum on their mortgage. But ISAs are complex and it’s advised only to go down this route if you have sought reliable, professional financial advice.
A pension plan mortgage uses the tax-free cash lump sum of a personal pension scheme to repay an interest-only mortgage at retirement.
The type of deal you are offered differs from lender to lender and will also be determined by your personal circumstances. Whether you’re a first-time buyer, you’re moving home or you’re looking to remortgage will all affect the deal you are offered.
A variable-rate deal does not remain at a fixed rate for the duration of your mortgage, and include discounted deals whereby your rate is set to track your mortgage lender’s standard variable rate (SVR) or the Bank of England base rate (tracker deals).
The only downside with variable-rate mortgages is that while it may offer reduced payment while interest rates remain low, if interest rates rise so too do your repayments, making it hard to budget long-term.
2. Fixed-rate mortgages
Fixed-rate mortgages are exactly that – your rate and your repayments remain the same for the length of the loan. This is great because regardless of fluctuations in interest rates, you will know exactly what you have to pay each month.
Note: You should always seek the advice of a professional mortgage adviser who will be able to offer you tailored advice based on your individual circumstances.