Types of Mortgage

When choosing a mortgage you need to asses your needs and choose one that is right for you. You will have to consider repayment methods and interest rates. Some lenders may provide mortgages with unique features or deals; you will need to select a mortgage that suits your circumstances and property type and one that will serve you short-term and long-term depending on your plans.

Really there are two main types of mortgage available and are basically divided into two different methods of payment. There are many variations on these two payment methods, often when people are choosing their mortgage they are overwhelmed by the choice of mortgages and lenders. An easy way to start looking at mortgages is to first look at the two main repayment methods then later on deciding which variation is right for you.

The two main mortgage types (repayment methods):

  1. Repayment Mortgage - This is also sometimes referred to as a "capital and interest loan" this is because the repayments consist of one part interest payment and one part capital (the actual debt). You continue pay off both the interest and the capital until the whole loan amount is cleared. The initial payments on most of these type of mortgages consist mainly of interest but over time the amount of interest gradually lowers enabling you to pay off more of the capital.
  2. Interest Only Mortgage - With this kind of mortgage you make monthly repayments for the life of the mortgage that only cover the interest on the loan. In addition to the monthly repayments you will have to pay into a separate savings or investment scheme, when the term of the mortgage is up you can then cash in your investments and use them cash to pay off the loan, if you are lucky you may have some surplus cash from your investments after paying off the amount you owe. The investment side of things can be risky so you will need to invest in a safe and recommended scheme. Some mortgage providers will have their own investment scheme; other will require you to find your own. Some mortgage providers might not even check you have a saving or investment plan in place so it will be your responsibility to ensure you can pay off the loan at the end of the term or you could loose your home.

After you have decided which repayment method suits you best you can then go and look at what deals are available. The main differences between the deals and different arrangements are to do with interest; how much interest and how much it will vary.

Some common types of deals:

  • Fixed Rate - As the name suggests the interest is set at fixed rate. You pay the fixed rate for a specified term (normally between 2 and 5 years) after the fixed rate term is over you will return to the lenders standard variable rate. There may be penalties if you pull out before the term is over. After the fixed rate many people then remortgage with a different provider to obtain them selves a new lower rate. One of the possible disadvantages of this kind of mortgage is that if the Bank of England suddenly cuts interest rates you could be left with a high uncompetitive fixed rate; however this is unlikely in the short to mid-term.
  • Standard Variable Rate - With this type of mortgage the interest rate will vary depending on the lenders standard variable rate. The rate may be inline with the Bank of England base rate.
  • Standard Variable Rate with Cash-Back - Similar to a Standard Variable Rate Mortgages but with a cash lump some at the beginning of the mortgage. You may be tied into the variable rate for a specified term.
  • Discounted Rate - Often in conjunction with an introductory offer you will benefit from a special low interest rate for a set period before returning to the lenders standard variable rate.
  • Tracker - This type of mortgage tracks the Bank of England base rate or perhaps another institutions rate.
  • Capped and Collared Rate- These are types of variable interest mortgage where the interest rate has a "cap"(limit) to ensure that you don't pay over a certain amount for a certain term. Some may also have a "collar" which prevents rates going below a set level, if interest rates do drop below your collar level then you are not entitled to them as you have previously agreed that the collar rate is the lowest possible rate for your mortgage.
  • Current Account, Offset and Flexible Mortgages - These types of mortgages give you more control over your repayments, for instance you can choose to pay lump sum amounts, take back lump sums, take payment holidays, pay more one month (overpayments) or less the next (underpayments), and even allow you to pay off your whole mortgage early.

When choosing between repayment methods and interest types you need to choose something that suits your current circumstances and one that will not pose to be a problem in the foreseeable future. Depending on your situation you may wish to take a long or short term deal, certain special offers might have benefits that are more suited to your circumstances.

It is advisable to shop around, comparing rates from different lenders. Compare internet and telephone based companies with high street lenders to ensure you get the best possible mortgage for you because after all a mortgage isn't just for Christmas. A mortgage is a serious long term arrangement that will most probably seriously affect your finances for many years or even decades to come. If you are ever in doubt always seek sound professional financial advice.

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