What types of mortgage are there?
A mortgage is a secured loan taken out to buy either property or land. ‘Secured’ means the lender has the right to repossess the property or land until the borrower has repaid the loan. It means that if the borrower defaults on the repayments, or can’t repay the loan, the lender can sell the property to get their money back.
A mortgage is made up of two parts: ‘capital’, the money you borrow, and ‘interest’, the money you pay the lender for doing so. You enter into a contract with the mortgage provider to repay the loan over an agreed period of time: the ‘mortgage term’.
How you are expected to repay the loan and how the interest is applied determines how the mortgage is classified and what it is called.
Repayment (capital and interest) mortgage
A repayment mortgage means that you repay both the capital and interest in regular monthly payments. At the end of the mortgage term both the capital and the interest have been repaid in full so, as nothing is owed to the mortgage provider, the mortgage is deemed to have been paid off.
An interest-only mortgage means making regular monthly payments which repay only the interest due on the loan. This means that at the end of the mortgage term only the interest has been paid; the capital still has to be repaid in order to pay off the mortgage.
This is a combination of a repayment and an interest-only mortgage and tries to maximise the advantages and minimise the disadvantages of each. Part of the mortgage is considered to be a repayment mortgage, the rest is treated as an interest-only mortgage; the exact split being agreed between you and the mortgage provider.
This is the simplest, most straightforward type of mortgage as the rate of interest charged is fixed for a set period of time. For you, the borrower, it means the size of your monthly repayment is fixed which helps make managing your domestic finances easier. The downside is that the mortgage provider charges a higher rate of interest to offset any potential loss caused by a rise in the Bank of England base rate.
Standard variable-rate (‘SVR’) Mortgage
A standard variable-rate mortgage has two features. Firstly: ‘standard’ means it’s the mortgage provider’s basic or default interest rate, and, secondly: ‘variable-rate’ means the interest rate you are charged may vary during the mortgage term. Although interest rates are influenced by movements in the Bank of England’s base rate, the SVR is set by the mortgage provider and that means that fluctuations in the rate you are charged may not follow the base rate.
This is the most popular type of variable-rate mortgage. The rate of interest charged by the mortgage provider follows, or ‘tracks’, the Bank of England base rate; it means that, unlike SVRs, fluctuations in the base rate are mirrored by changes in your mortgage interest rate.
This is another type of variable-rate mortgage. Unlike tracker mortgages, the interest rate charged is linked to the mortgage provider’s standard variable rate and, as this isn’t linked to the Bank of England base rate, the mortgage provider can change it at any time.
This is a variable-rate mortgage but with an important feature: it has an interest rate ceiling. Although the interest rate you are charged won’t exceed the ceiling, the rate you’ll be paying will be higher to compensate for the mortgage provider’s loss during those periods of time when they could have been charging you a higher rate of interest.
This takes into consideration any savings you may have with the mortgage provider, the value of these being set against, or ‘offset’, against what you owe on your mortgage. Although this reduces the overall amount of interest you pay on your mortgage, you won’t receive interest on your savings.
This is a standard mortgage with a variety of optional-extra features designed to help you. Having them may be useful but, remember, ‘there’s no such thing as a free lunch’! Any extras will come at a price and this will be reflected in the interest rate you pay.
How can One Financial Solutions help you?
One Financial Solutions is here to help you no matter whether you’re a first-time buyer, thinking about ‘buy-to-let’ as an investment opportunity or wanting to know the pros and cons of equity release.
Buying a property is probably the greatest financial undertaking most of us will ever make; it’s a huge commitment and one that needs to be thoroughly considered, ideally with the help of an expert guide. As a truly independent firm of financial advisers we’ll make sure the mortgage we recommend to you is selected from the entire market and is the one that is best for you.
So, if you’re looking for a mortgage or just want advice on an associated subject, please call us on 020 3714 9565 or ask us to call you by sending an email to email@example.com.