What Different Types Of Mortgage Are There?

In short, there are a lot. The basis of a mortgage is simple enough; you want to buy property and so borrow the money to do so, make repayments for a number of years on the loan plus interest and eventually pay it off. After that it gets a little more confusing as there are so many variables, depending on several factors. These include interest rate, length of time you want to be repaying the mortgage, reason for buying the property plus the charges and other costs that might be involved.

Here’s a very brief overview of some of the options out there.

1.      Interest-Only Mortgages

You only pay the interest each month and at the end of the mortgage term have to pay the original cost of the loan. Monthly repayments are low, but you will need to have money set aside to pay off the loan or a plan as to how you can repay it.

2.      Repayment Mortgages

A much more common option whereby you are paying off some interest along with some of the actual loan each month and will see your overall debt reducing year by year. At the end of your mortgage term, say 25 years, you will have repaid the entire amount.

3.      Variable Rate Mortgages

Every lender has a standard variable rate (SVR) mortgage which goes up and down, partly to do with the Bank of England rate changes, but other factors come into play as well. The two main types of variable rate are Tracker Mortgages which move in line with the interest rate but are usually slightly below (minimum rates usually apply) and Discount Mortgages where you repay at the SVR with an agreed discount for a set period.

4.      Capped Rate Mortgages

A variable rate mortgage but with a ceiling as to how high the rate will rise. Particularly beneficial if you think the interest rates are about to go up rapidly but not so if interest rates are low.

5.      Fixed Rate Mortgages

With these deals, a rate is set for a period of time, usually two to five years, and it will not change regardless of what happens with the interest rate. This does mean the fixed rate could be higher than the actual base rate but as it is fixed for a set period, you know it won’t change until your time is up.

6.      Offset Mortgages

If you have a good amount of savings, this can be a good option as you only pay interest on the difference between your mortgage amount and your savings amount. And if using your savings to pay your mortgage, you won’t pay tax on your savings. But it’s unlikely to be as good a rate as you may find on other mortgage offerings.

7.      Cashback Mortgages

The lender will give you a lump sum (usually a percentage of the whole loan amount) which can be useful to help with moving costs. However, the interest rate you’re charged is likely to be higher than the going market rate.

8.      95% and 100% Mortgages

If you have a minimal or zero deposit to put down on a property, this may be an option – but it is a risky one as all it takes is a dip in the property market and your house could be worth less than the value of your loan – this is negative equity. *100% mortgages requires an additional property.

9.      Flexible Mortgages

As the name suggests, you can pay more or less than your standard repayment amount. Handy if you think you may have a bump in your cashflow or are able to make overpayments. But this flexibility will come at the price of a higher interest rate.

10.  Buy-to-Let Mortgages

Purely for those who want to buy a property to rent out rather than live in. The amount of loan is based on the expected rental value and borrower’s ability to make repayments.

First-time buyers can generally apply for any of these options (except Buy-to-Let) and there is also the government’s Help to Buy scheme to help people get onto the property ladder in the first place. There is a lot more to mortgages than this very brief overview and there are pros and cons to each. It can be a bit of a minefield trying to decipher the best course of action for your own situation. The very best thing you can do is speak to an independent mortgage adviser, who can talk you through your choices and find the right deal for your own circumstances. Good luck!

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