A Guide to the Different Mortgages Available

It doesn't matter if you have had mortgages before or not, it is still a big financial decision to make. Even more so nowadays with the huge choice of mortgages available. It can get confusing with the different options being offered. The most important two things to decide on are what loan type do you want to get and how do you wish to repay the loan. Here is a guide to what options are available to you today.

What are the types of loans I can choose from?

Fixed Rate Loans

A good choice for those who like go know exactly what they will be paying month to month. Interest rates are fixed for a set period of time, so are guaranteed not to change making it easier to budget and plan ahead. Many fixed-rate loans are for the first 2-3 years of your mortgage but you can get 5 years ones and even 25 year ones are slowly coming into play.

Variable Rate Loans

The interest rates on variable rate loans are not fixed and can go up and down according to the lender. Discounts may be offered for the first few years with new borrowers. Great when interest rates are low but if they start to creep up, so will your monthly repayments so you have to know you can afford some increase.

Capped Rate Loans

Similar to fixed rates, the Capped-rate loan interest rate is again guaranteed to stay under the agreed rate for a set period of time. The difference with this type of loan is that if interest rates fall, your repayments can drop in line with the interest rates.

Tracker Loans

Tracker Loans are linked to the base rate set by the Bank of England (BOE). The lower the base interest rate remains, the lower your repayments will be, however if it starts to increase as it has the past 12 months, you will be expected to pay more each month to keep up with your mortgage repayments.

Cashback Loans

If your loan application is accepted, the lender will offer borrowers cash back. Money to be spent as you wish, for any purpose. Some re-invest into their property, some save the money and others may treat themselves to a holiday. The choice is yours. Cashback can be between 6-8% of the loan total.

What are the types of repayment options I can choose from?

Repayment

By far the most common mortgage repayment option used. Each monthly repayment is split so part of it goes to pay off the actual loan amount, the other part will go towards paying off the the capital interest that has been calculated on the whole amount borrowed. So each year will see the outstanding balance of your mortgage reduce gradually. Can also be referred to as a Capital and Interest mortgage.

Interest Only

The borrowers monthly payments will only cover the cost of paying back the calculated interest on the full balance. This can result in cheaper monthly payments. However you must also set up to pay into a high interest savings account as this will be used to repay the capital of the full amount borrowed. Sometimes at the end of the mortgage term, people will sell the house and use the proceeds to finish repaying the full loan amount.

Offset

An offset mortgage involves taking out a current account and combining your loan with your normal in and outgoings. Interest is calculated on a daily basis so at times when you have lots of money in your account, the interest will be low but will rise slightly by the end of the month as money starts to leave your account. It can also work with a savings account and ultimately could save you money by reducing your interest charges and may help you pay off your mortgage earlier.

Endowment

Very popular a few decades ago, these mortgages were linked with a life assurance and profit policy. The policy was there to raise money which would eventually cover the cost of your mortgage by the end of the repayment term. Unfortunately the profit pay-out isn't guaranteed and recently many people have had problems paying their mortgage as the policy seriously under-performed and profits fell short of what was actually owed.

Other things to look out for and think about

Length of mortgage repayment term

Most mortgages are taken out for 25 years, however with house prices having risen so much over the past decade, many people unable to afford a 25 year mortgage are now being offered longer mortgages of between 30 and 40 years.

APR - the Annual Percentage Rate

This rate informs us of the interest rate that will apply over the mortgage term. It doesn't include certain factors such as administration costs, early repayment penalties, redemption penalties and other charges.

Product tie-ins

A few lenders may offer cheaper rates if you take out some of their other products such as home insurance. Payment protection policies are also another offer but these are usually much cheaper elsewhere.

Arrangement fees

There is generally a charge for arranging a mortgage which varied between lenders but can range from £200 and go up to £700. Make sure you fully understand what it covers and make sure you can get a refund if the house sale falls through.

Higher lending fee

Some lenders will let you borrow more than 90% of the value of the property you are buying, but may want to charge you an extra fee for this - check what it is before committing.

Early repayment penalties

Paying a mortgage off early can result in a penalty charge. Make sure you know your lenders policy on early repayments and how much you are likely to pay if you do finish paying your mortgage earlier than planned.