For the majority of mortgages, you borrow money from a lender to buy a property and pay interest on the loan until you have paid it back. The only exception are interest-only loans. Here are the different types of mortgages available:
- Fixed rate
- Variable rate
- Discounted rate
- Capped rate
- First time buyers
- Buy to let
Repayment mortgages: Every month you make a payment which is calculated so that you pay off some of the capital you have borrowed, as well as the interest. By the end of your mortgage term, you would have repaid the entire loan.
Interest-only mortgages: Each month you pay only the interest on your mortgage and repay the capital at the end of your mortgage term. This option will not suit everyone, as you will need to guarantee that you can find the money when the time comes. If you don’t, you risk having to sell your property to pay off the mortgage. Lenders can also insist that you provide evidence on how you intend to do this.
Fixed rate mortgages: Popular with first time buyers, as you know exactly how much you’ll be paying each month for a particular length of time.
The disadvantages are that you may have to pay a higher rate if the interest rate falls, and a repayment charge if you either switch or pay off your mortgage before the end of the fixed term.
The lender will also automatically place you on a standard variable rate (SVR), which will probably have a higher interest rate, in which case you will need to apply for another fixed rate deal.
Variable rate mortgages: Also known as a Standard Variable Rate (SVR) and are every lender’s basic mortgage. The interest rate fluctuates, but never above the Bank of England’s base rate and is determined by your mortgage lender.
Tracker mortgages: Vary according to a nominated base rate, normally the Bank of England’s, which you will pay a set interest rate above or below.
Discount rate mortgages: Some of the cheapest mortgages around but, as they are linked to the SVR, the rate will change according to the SVR and are only available for a fixed period of time.
Capped rate mortgages: A variable rate mortgage, but there is a limit on how much your interest rate can rise. However, as mortgage rates are generally low at present, many lenders are not offering them.
Cashback mortgages: Lenders typically give you a percentage of the loan back in cash. However, you need to look at the interest rate and any additional fees, as it is very likely that you will be able to find a better deal without cashback.
Offset mortgages: Combines your savings and mortgage together, by deducting the amount you have in your savings, meaning you only pay interest on the difference between the two. Using your savings to reduce your mortgage interest means you won’t earn any interest on them, but you will also not pay tax, helping higher rate taxpayers.
95% mortgages: Generally for those with only a 5% deposit. However, as there is a risk that you may fall into negative equity if house prices go down, mortgage rates are usually high.
Flexible mortgages: Allow you to overpay when you can afford to. Other mortgages give you this option too, but you can also pay less at particular times or miss a few payments altogether if you have chosen to overpay. This does however come at a cost, as the mortgage rate will generally be higher than other mortgage deals.
Buy to let mortgages: Enables you to purchase additional property for renting purposes only. The amount you can borrow is partially calculated on the rent payments you expect to receive.
First time buyers mortgages: All of the aforementioned mortgages are available to first time buyers, although some are more favourable than others. The government also offers a number of incentives for first time buyers through its help to buy scheme.