What type of mortgage do I need?
Whether you’re a first-time buyer or a current homeowner – the world of mortgages can be a pretty confusing place. If you’re trying to decide on the right type of mortgage, the amount of choice can be overwhelming – what’s the difference between a capital and repayment mortgage and an interest-free mortgage? Do you opt for a variable or fixed rate mortgage?
At iam mortgages, we are always trying to make the process of taking out a mortgage that little bit easier. Here’s our jargon-free guide to the various types of mortgage out there on the market, so you can decide what’s right for you. We’re also at the other end of the phone if you need to talk to one of our mortgage experts.
Capital and repayment mortgage
If you take out a repayment mortgage, you borrow a lump sum to pay for a house and gradually, month-by-month, pay it back to the lender along with interest. When the mortgage term ends, you’ll have paid off the entire loan and will own the property outright. Repayment mortgages are sometimes called ‘capital and repayment mortgages’, in reference to the amount of money you have left to pay back to the lender (the capital).
With an interest-only mortgage, you don’t actually pay off any of the lump sum you borrow from the lender (like a repayment mortgage). Instead, you just pay off the interest, meaning that your monthly payments are substantially lower, but don’t actually chip away at the mortgage sum overall. At the end of the term, with the interest paid back in full, you will then be required to pay off the full amount of the mortgage. It is common for borrowers to invest their mortgage so that they can get some return on it, which can be used to pay off the final sum at the end of the mortgage term.
Fixed rate mortgage
If you have a fixed rate mortgage, you will have an agreement with your lender that the interest rate you pay along with your monthly mortgage repayments will stay the same for a ‘fixed’ amount of time. You can choose how long you wish to fix your interest rate for – some lenders offer deals for anywhere between two and ten years. When this period ends, you’ll be switched onto your lender’s usual rate of interest (their Standard Variable Rate), which will typically be higher than the ‘fixed’ rate you were paying.
Standard Variable Rate (SVR) mortgage
A lender’s Standard Variable Rate (SVR) is their typical rate of interest that they charge on top of mortgage repayments. This rate will vary from lender to lender, and can be adjusted as they wish. When a mortgage deal comes to an end, you will be switched to a lender’s SVR. This normally isn’t the best mortgage deal available, and can cost you more money in the long run. If you’d like help finding the right mortgage deal for you, contact our experts at iam mortgages today.
With a tracker mortgage, you could potentially pay a different amount back to your lender every month. This is because tracker mortgages follow a certain interest rate (such as the Base Rate of the Bank of England), and add a fixed amount on top, meaning that your monthly payments can generally go up or down. This type of mortgage is known as a ‘variable rate’ mortgage.
Capped rate mortgage
A capped rate mortgage has a variable rate, meaning that sums you pay back month-on-month can go up or down, but the overall amount that the interest can rise is ‘capped’. Interest rates are usually higher for capped rate mortgages than tracker mortgages, so you could end up paying a premium for the capped rate.
Some lenders offer cashback mortgages, meaning that when you sign up to them you receive a sum of money back that is a small percentage of your overall loan.
A flexible mortgage gives you the convenience and adaptability to make either monthly underpayments or overpayments to your lender. This means you can pay more than your agreed monthly mortgage payment (if desired), or take the option to miss a monthly payment if you want to (known as a ‘payment holiday’). Flexible mortgages usually come with a higher rate of interest.
An offset mortgage is a method of using your savings account to reduce the amount of interest you pay on the sum you have borrowed from a lender. You will need to open a current or savings account with your mortgage provider and join these together so that they reduce the amount of interest you pay overall. For instance, if you have £200,000 in a lump sum that you need to pay back on your mortgage, but you have £20,000 in a savings account through the same lender, you can ‘offset’ your savings against your mortgage so that you only need to pay interest on £180,000 of the lump sum borrowed (as you don’t pay interest on the sum in your savings account).
95% and 100% mortgages
These high-percentage mortgages are for customers who can only afford to put down a small deposit, or for first-time buyers. You’d put down 5% of your deposit and pay back 95% of the loan as a repayment mortgage plan. Your monthly payments are likely to be higher than other mortgage deals because of the large lump sum needed to be paid back. In the case of 100% mortgages, some lenders require the extra security of a guarantor such as a parent.
Buy-to-let mortgages are for people who want to rent a property as a landlord. The amount you can borrow on a buy-to-let mortgage depends on your estimated monthly rental income. This type of mortgage is usually not offered to first-time buyers, as lenders will usually want customers to have an additional property that they live in themselves.
If you are still undecided about the type of mortgage you need for your circumstances, get in touch with our experts at iam mortgages today. We can talk you through your options and compare deals so that you can find a rate that suits you. Our advice service is completely free – simply fill in an enquiry form or give us a call.