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WHAT DOES A MORTGAGE MEAN?
Once you start planning to buy your own home, your search for the perfect mortgage will inevitably follow.
A mortgage is a legally binding contract between you and your lender, where you are borrowing money from the lender to buy a property. The terms and conditions of your mortgages, the interest rate, the term of loan and the mode of repayment are all laid out in this contract.
Repayment Mortgages
In this type of mortgage, you will be paying back both the capital and interest in monthly instalments. By the end of the mortgage term, you will have paid off the entire mortgage (including the capital and interest) and the home belongs to you, which is why a lot of people prefer this type of mortgage.
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Interest-only mortgages
In these mortgages, as their name suggests, you will be paying only the interest, not the capital. So at the end of the mortgage term, you will still owe the entire capital that you borrowed.
This type of mortgage is popular because the monthly payments are lower than repayment mortgages.
What are the different types of mortgage?
There are two main types of mortgage
- Fixed rate mortgages
- Variable rate mortgages, which include
- Tracker mortgages
- Discounted rate mortgages
- Capped rate mortgages
Fixed rate mortgages
Fixed Interest rate
In fixed interest rate mortgages, the lender ‘freezes’ your interest rate for a fixed period of time, usually for 2 or 5 years. A few lenders may offer fixed rate mortgages for 10 years too.
During the fixed interest rate period, you will pay the same interest rate. This has the advantage of keeping your rate the same even if overall rates rise. However, most fixed interest rate mortgages have an exit fee (also known as an Early Repayment Charge), which will charge you a penalty amount if you want to change your mortgage deal before the fixed rate period is over.
If you have to move home before your fixed interest rate comes to an end, there are ‘portable’ mortgages which let you apply your existing mortgage rate to your new home.
The allure of fixed rate mortgage is that, you know exactly how much you will be paying every month, which helps you to budget and does not give you any surprises, ie. Monthly payments going up.
Variable rate mortgages
In variable rate mortgages, your monthly mortgage payments can rise or fall according to the raise and fall of the interest rates
Lenders usually have a Standard Variable Rate (SVR), which is the interested rate charged when a fixed interest rate mortgage deal comes to an end. Standard Variable rate mortgages typically have no Early Repayment Charges (ERCs).
There are 3 different types of variable rate mortgages:
- Tracker mortgages
- Discounted rate mortgages
- Capped rate mortgages
Tracker mortgages
These mortgages track the Bank of England base rate, plus a percentage set by the lender, for a set period of time. When the base rate goes up, your mortgage rate will rise by the same amount, raising your monthly payments. When base rate falls, your rate will go down and so will your monthly mortgage payments.
Lenders usually set a minimum rate below which your interest rate will never drop but there’s usually no limit to how high it can go.
Discount rate mortgages
Discounted mortgages give you a discount on the lender’s Standard Variable Rate (SVR) for an initial period of two to five years. This type of mortgage can be one of the cheapest deals but, as they are linked to the Standard Variable Rate, your monthly mortgage payments will go up and down according to the fluctuation of the interest rates.
Capped rate mortgages
Capped mortgage rates can go up and down as well, but unlike the discounted mortgage rates, there is an upper limit above which the interest rates do not go. This is why this type of mortgage is more popular than the discounted mortgage rates, as it ensures that your monthly mortgage payments will ever rise above a certain amount.
The downsides to the capped rate mortgage are that the interest rates are usually slightly higher than other mortgages and that there is usually an Early Repayment Charge associated with it.
Offset mortgages
An offset mortgage lets you combine your savings account and your mortgage account into one account, so that your savings go towards your mortgage payments. The interest that you earn from your savings go towards paying the interest on your mortgage.
Here is an example: If you have a mortgage of £200,000 and savings of £10,000, your mortgage interest is calculated on £190,000 for that month.
The advantage of this type of mortgage is that clients still have access to their savings and can withdraw money at any time.
Buy to Let mortgages
Buy to Let mortgages are most suitable if you want to buy a property as an investment, ie. To rent out.
The advantage of this type of mortgage is that the monthly repayment amounts are low compared to other types of mortgages. However, you will still owe the entire capital amount at the end of your mortgage term.
No matter which type of mortgage deal you choose, our expert mortgage advisers are there to help you. We will discuss the pros and cons of each deal and offer their professional advice. We do not charge you any money for our services.