Different Types Of Mortgages In The UK
Rather like a full house in poker there seems to be a wide selection of mortgages on the market, but aren’t many of them the same kind of product?
Two of a Kind
There are fundamentally only two types of mortgage: either repayment mortgages or interest only mortgages. There is now a third type known as a current account mortgage but that is more like a bank account. The choice of mortgage seems confusing because you have to throw in all the various interest related differences onto each product. For instance, there are fixed interest mortgages, variable mortgages and capped rate mortgages.
Repayment and Payments
A repayment mortgage is one where each month you are paying off part of the total loan capital and some of the interest.
Interest only mortgages are ones where you only pay off the interest on the capital sum and you have to have another policy such as a pension or a life assurance plan that will mature when the period of the mortgage is over so you can repay the loan.
These interest only mortgages have largely fallen out of favour in this country, although they can still beneficial if you can arrange a suitable plan that will more or less guarantee to pay out more than the value of the loan. However, nothing on the money markets can be an absolutely guaranteed pay-out.
Current account mortgages are a comparatively recent development. They are sometimes called off-set mortgages and represent a flexible way to pay off your debt. Your mortgage in this instance becomes your current account and with it you get a cheque book, credit and debit card and regular statements just as you would with a standard current account. What’s more your regular earnings are paid straight into this account.
Because interest is calculated daily on mortgages the fact that your total regular earnings are put into this account means that you save interest on your mortgage. This could save you thousands of pounds over the term of the whole mortgage.
What’s the catch?
Well, of course there is one. This mortgage is like having a huge overdraft: if we assume that your mortgage is £100,000 and you receive £1,000 credit then your balance will show as £99,000 in the red. The fact that you have access to this large ‘overdraft’ means that you don’t really have any limits on how much you can spend.
So unless you are extremely disciplined you may find it easy to completely make a mess of your finances and run up more debt on your mortgage than just the initial loan and then you may have no way to pay it all back.
Other types of mortgage include:
Flexible mortgages: which allow you to vary the amounts you pay each month. Capped mortgages, where you always know what the maximum amount going out of your account is going to be and
Cashback mortgages: most of which give you a few hundred pounds back when you complete the mortgage application.
Tracking to Base
Don’t be confused by some of the terminology, products like base rate tracker are really just a variable rate mortgage. With these the repayments you make will vary in line with the fluctuations of the Bank of England’s base rate, although it will be a percentage point of two higher than the base rate it will remain linked by the same percentage difference. Unlike a normal variable mortgage where your monthly repayment might not change with each change of the Bank of England’s Base Rate, base rate tracker mortgages change every time the base rate changes.
Finally, there are specific mortgages for those who want to declare their own ability to meet the loan. Usually these mortgages are for a sum that is higher than the lender will lend as a matter of course on the applicant’s salary combinations. These mortgages are called Self-certification mortgages.
Finally, if you fancy yourself as a bit of a landlord and want to buy property to let there are specific “Buy to Let” mortgages where the applicant’s ability to repay the loan is, again, assessed slightly differently and the income the house will generate is taken into account.