A Definitive Guide to the Various Types of Mortgages. Rates, Mortgage Repayment Methods And More.....
A Definitive Guide to the Various Types of Mortgages
When considering which type of mortgage to take out you will quickly discover that there are lots of options and many considerations. The types of mortgages vary from the repayment type, the mortgage rate, the product features and who is eligible for the mortgage.
Fox Davidson are an independent mortgage broker and advise on and recommend all types of mortgages. Here is our definitive guide to the various types of Mortgages.
Which Mortgage Am I Eligible for?
Home Purchase Mortgage – A mortgage secured on a house or flat for the occupation by yourself and/or your family.
Re-mortgage – Changing mortgage lender usually to secure a better rate of interest. You might also remortgage to raise more funds for various reasons. See our remortgage guide for more details.
First Time Buyer Mortgage – If you have not previously owned a property you are classed as a first time buyer. Some lenders offer discounts on the fees and rates to first time buyers.
Buy to Let Mortgage – A mortgage on a property that you will let out to unrelated tenants, usually let on a 6 or 12 months assured shorthold tenancy (AST) agreement.
Commercial Mortgage – A mortgage for business purposes, this can either be for your business occupation or purchased as an investment and let to a separate business on a longer term lease.
Second Charge Mortgage – Most lenders only lend on a 1st charge basis. A 2nd charge is possible for additional borrowing where you do not wish to remortgage.
The type of rate that you choose will depend on your attitude to risk and your future plans. These details and more will be considered by your mortgage advisor.
Fixed Rate Mortgage – The rate of intertest is fixed. The terms lenders will offer vary from 2, 3 and 5 years with some lenders offering 10 year fixed rates.
The obvious advantage of a fixed rate is that your payments will be fixed each month. The disadvantage is that in a falling interest rate era you will not benefit from the fall in rates.
You are usually also tied in to the lender by an early repayment charge during the fixed rate period. Ost lenders will allow you to make over payments of up to 10% each year without paying the early repayment charge.
Tracker Rate Mortgage – A tracker rate mortgage will track either the Bank of England base rate (BBR) or the London Inter Bank Offering Rate (LIBOR). A rate that tracks one of the rates will go up as well as down.
The advantage of a tracker is that in a falling rate environment you will benefit from a falling interest rate.
The disadvantage is that during a period of increasing interest rates your mortgage rate will increase.
Trackers sometimes have no early repayment charges.
A tracker may be for 2/3 years and then revert to the lenders variable rate. A tracker can also track the BBR or LIBOR by a set % for the life of the loan.
Variable Rate Mortgages – A variable mortgage is one that tracks the lenders standard variable rate. The lenders standard variable rate does not necessarily track anything itself and can be set independently by the lender.
Discounted Mortgage – A discounted mortgage will be a discount from the lenders variable rate for set period. After the discount, the rate will usually revert to the lenders variable rate.
Offset Mortgage – An offset mortgage is a clever mortgage. This will appeal to those with savings such as the self-employed who save money for tax purposes. Your savings offset against the mortgage balance and you only pay interest on the net balance. Read more in our offset mortgages guide.
Cashback Mortgage – Lenders often add incentives to attract business and a cash back mortgage is one of those incentives. Cashback is usually paid on completion and can be used for any purpose. Your mortgage broker will work out the true cost of the cashback by also considering the interest you will pay over a set period and any fees you will pay.
Flexible Mortgages – Not as flexible as they used to be but flexible mortgages usually come with no early repayment charges and allow you to make lump sum payments into the mortgage without penalty. Some lenders will offer payment holidays in light of any overpayments. Offset mortgages are typically flexible mortgages.
Methods of Repaying The Mortgage
Repayment (Capital & Interest) – This is the standard way of repaying any loan. You pay back the capital each month along with interest and at the end of the mortgage term the loan is repaid in full. This is a low risk way of repaying a mortgage.
Interest Only – Some lenders will allow you to only pay the interest each month. At the end of the mortgage term the initial loan amount will still be outstanding. Interest only mortgages are harder to come by after a crackdown by the FSA who were concerned that many homeowners would reach the end of their mortgage term and have no means to repay their loan other than to sell their main residence. Lenders do not want headlines stating ‘pensioners kicked out of their home’.
Interest only is now heavily policed and you will need to have a suitable repayment vehicle in place. Examples include; sale of property, investments such as stocks and shares and regular bonus payments from employment.
Part & Part Mortgage – This is a hybrid of the above 2 methods and can be utilised to gain a higher loan to value than simply having an interest only mortgage. Part and Part mortgages work well in the right situation and for the right client.
Fox Davidson mortgage brokers provide a full advice and recommendation service. Your situation and your mortgage requirements will be considered by your mortgage advisor. Once a full fact find has been completed Fox Davidson will make a formal recommendation.