Mortgages should be pretty straightforward - you borrow money to buy a house and you also then pay interest on the loan. But after a bit of online searching, you soon realise that it's not so simple after all. In a hugely competitive market, building societies and banks are continually updating and extending their range of mortgages. The list is already extensive enough to confuse all but the most determined however we have tried to demystify some of the jargon for you here.
Repayment mortgage
With this type of mortgage you make monthly repayments over an agreed period and when you come to the end of the term you've paid back the whole of the loan and all of the interest on the loan. The advantage is that it's simple and very clear. You can see that the money owed is reducing and you are safe in the knowledge that at the end of the term there will be nothing owed. The disadvantage is that in the early years your payments are made up of mainly interest so if you happen to want to re-pay the mortgage in the early years it may look like the loan has not actually decreased by very much.
Interest only mortgage
As above, with this mortgage you make monthly repayments over an agreed period but unlike a repayment mortgage - with this mortgage type you are only actually paying back the interest of the loan. The loan itself will still need to be paid at the end of the term of the mortgage and you would typically do this by paying into another savings or investment plan which you would then have to monitor to ensure the plan held enough money to repay the loan at the end of term. Be cautious if you are hoping to rely on the rise in the property value because prices in property can fall. The advantages of this type of mortgage is that the monthly payment will be lower but on the downside - the original debt doesn't actually disappear. If you can't pay the original debt back at the end of the term then you could potentially lose your home.
To compare our most popular mortgage offerings click here.
Types of interest rate
'Repayment' and 'Interest only' mortgages can be offered with a number of different ways to calculate the interest rate on your mortgage. Below is an explanation of the most popular.
Fixed interest rate
Your payments are set in stone at a certain level for an agreed period of time so regardless of what is happening in the economy or to the Bank of England's rate - your payment will stay the same. Once this has ended the lender will typically switch you over to the standard variable rate (see below). If you're looking for security of knowing you can afford the payment then this option may be your preference. Do bear in mind though, that if the interest rate dips - your payments will remain the same so you will not be reaping the benefit.
To compare our Fixed Rate mortgages click here.
Standard variable rate
Your monthly payments can go up or down at the discretion of your mortgage lender. Their decision is typically influenced by what is happening in the economy and what the Bank of England's Interest Rate is doing. You will always take a chance with a variable rate mortgage - you may be getting the advantages if the base rates are low but you have to be prepared to take the hit if the lender decides to increase the rate.
Tracker rate
This is also a variable interest rate which can be equal to or a specific amount above or below the base rate (normally Bank of England rate). It simply moves up or down with that rate by a certain percentage. If you're happy to take advantage of a low base rate then you must also be prepared to take the gamble if the base rate starts to rise as you will have to find the extra amount in your budget to cover the increase.
To compare our Tracker Rate Mortgages click here.
Discounted rate
This is normally the standard variable rate but the lender is offering a discount on the interest rate for a period of time. Once the deal time has come to an end you will switch over to the full standard variable rate. This is often an incentive to a first time buyer who will have other initial purchases and want to keep payments lower initially -but do ensure that you have the money in your budget at the end of the discounted period and bear in mind that the lender typically is entitled to increase / decrease the rate after the discounted rate has ended.
Capped rate
With a capped rate your payments are still variable but set so they will not go above a particular level (the cap). You typically have the 'cap' set for a certain length of time, say two years, and at the end of this period of time you swap over to the lender's standard variable rate. The advantage of this option is that you know that your monthly payment will never exceed a certain figure but you will still get the added bonus of lower payments if the rate falls.
The mortgage package
Mortgage lenders may package the mortgage up to offer additional features to suit certain borrowers.The main package forms are.
Cashback mortgage
The lender offers you a sum of money shortly after you take up your loan. This can be a % of the loan or may be a specific lump sum (say £1500). They normally give this to you shortly after your full application has been processed and completed. Note however that if you switch lenders early on then you may have to repay some or all of this money back. The cashback feature is often very appealing to first time buyers that have high initial expenditure (electrical appliances etc). However, if you can manage without the cashback feature you might find better deals on the market.
The flexible mortgage
A few years ago, you would have to specifically look out for ' the flexible mortgage' to take advantage of some of the features it offered - such as being able to pay more than your monthly mortgage payment or paying off a lump sum, but in today's market the great features of the flexible mortgage are being offered on more and more mortgages as standard. Other features to look out for are.
- The ability to underpay or take a payment holiday: the flexibility to take a break from your mortgages payments (say during maternity leave) is a great feature. But it's not just useful for planned finance shortfalls such as the birth of a child. It's also very useful to cover the unexpected - such as redundancy.
- The ability to 'borrow back': some flexible mortgages allow you to borrow extra money without having to go through any process. Often, you are simply 'borrowing back' money that you have in fact paid in earlier repayments but the beauty of being able to have access to money quickly is often useful - particularly if you have no savings to call upon.
To compare flexible / Offset Mortgages click here.
Offset mortgage
This is where your main current account or savings account (or both) are linked to your mortgage. Generally the same lender holds all three accounts (mortgage, current, savings) but not always. If the balances in your current and/or savings account are high then you pay less on your mortgage so if you happen to hold a high level of savings then this account could be for you. If they are low - then you will be paying more on your mortgage and you would be better off looking at some other mortgage features more suitable. To compare Offset / flexible Mortgages click here.
Current account mortgage
Almost identical to an offset mortgage but instead of having a mortgage and a separate current account they are joined together and you simply have one account that looks like it is a very large overdraft. To compare current account mortgages click here
Self certification mortgage
If you can't prove your income (perhaps because you're self-employed and don't have accounts going back far enough), you may be able to get a 'self-certification' mortgage. Although you may not have to offer proof of income to the lender, the lender will still want to be sure that you can afford the repayments so may ask you to provide evidence of your other outgoings.
The 'key facts' document
Mortgage providers are now legally bound to present customers with a key facts document. Do always read this document before you enter in to an agreement with your lender as you will have to confirm that you have received the key facts before signing off the application form anyway.
The Financial Services Authority (FSA) says the key facts document should deliver clear and simple information to consumers about the mortgage offer. The key facts document sets out the total cost of the loan - not just the headline interest rate - including any up-front fees so this is the time that you truly can see the complete cost of the money you are borrowing.
Author: KYM Editor
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