With so many different mortgages available, some help to guide you through the main types, from capped to offset to tracker mortgages.
Capital and interest – or repayment mortgage – These are the traditional mortgages whereby the monthly repayments consist of interest and capital.
Capped rate mortgages – The mortgage lender guarantees that the interest rate does not exeed a defined upper rate, the capped rate, for an agreed period. This remains the case even if interest rates and therefore the lender’s SVR go above the agreed limit.
Cash back mortgages – With these mortgages, at the start of the mortgage you receive a cash lump sum, either a percentage of the loan or more commonly a flat figure.
Discounted mortgages – The mortgage lender applies a discount off their standard variable rate (SVR) for an agreed period of time. The period is usually 2 or 3 years and at the end of it the mortgage reverts to the SVR.
Discounted tracker mortgages – A variable rate mortgage that, for an agreed time, is discounted from the Bank of England’s base rate by a set percentage.
Fixed rate mortgages – The mortgage interest is fixed for an agreed period of time.
Flexible mortgages – These mortgages allow you to vary your repayments through allowing you to overpay, underpay or take payment holidays.
Interest only or Endowment mortgages – For these, only the interest charges due on the mortgage are paid each month. The capital amount is not reduced during the period. This means the mortgage holder has to have a way of paying off the interest only mortgage at the end of the term.
This could be by selling the asset, the property.
This type of mortgage became known as an endowment mortgage as in the 1980s, when it was a really popular type of mortgage, it was often linked to an endowment policy with the expectation that the policy would provide a lump sum to pay off the mortgage.
Unfortunately during the late ’90s the performance of endowment policies became very poor meaning many didn’t pay out the expected sum, leaving mortgage holders short to pay off their mortgage.
As a result, endowment or interest only mortgages are not now very popular.
Offset mortgages – These are relatively new to the market which enable you to link your current, savings and / or deposit accounts to the mortgage. The credit account balances are offset against the amount of the mortgage. This results in reduced interest payments as the interest is only charged on the balance.
For example, if you have an offser mortgage of 220,000 and a credit balance of £40,000 on you savings accounts, you would only be charged interest on £180,000.
Remortgage – A new mortgage taken out even though you are not moving home.
Self certification mortgages – The borrower certifies their own income as they are unable to prove their income through normal payslips or audited accounts. Following the banking crisis, these mortgages are few and far between.
Tracker mortgages – A mortgage rate is agreed that is linked to the Bank of England base rate or the mortgage lender’s Standard Variable Rate (SVR). This could be either the base rate or SVR plus an agreed amount, or the base rate or SVR less an agreed amount.
Buy to Let mortgages – A mortgage for a property that the owner, the person with the mortgage, plans to let out to tenants. Unlike other mortgages detailed, a buy to let mortgage is usually calculated on the rental income rather than the income of the mortgagee.