Types of Mortgages

Interest only, repayment, tracked, variable, fixed and capped; what does it all mean?!! It can be very confusing to know what you are getting into when getting a mortgage so we have but this guide together to help you know the difference

What is a Mortgage?

It’s a form of borrowing to buy a property. You can either pay a little as you go (repayment mortgage) or pay it all off at the end (interest only or endowment mortgages).

Repayment mortgages

Each month you pay off some of the outstanding debt as well as interest on the loan. At the end of the mortgage term the house is paid for and you have no outstanding debt providing you have kept up with all the payments.

Interest only mortgages

With an interest only mortgage you only payoff the interest but not the capital or sum you borrowed.

At the end of the mortgage term (normally 25 years) you have to repay the capital you borrowed. This means that you must have saved up enough money elsewhere to pay back the loan. If you haven't you possibly need to sell your house to find the money.

Interest only mortgages are popular amongst buy to let investors and first time buyers because the payments are lower. Most people hope that after a few years they can start saving or change to a repayment mortgage.

Endowment Mortgages

An endowment mortgage is where you take out a separate Endowment policy which at the end of the loan team should pay off your mortgage, it also provides life insurance cover too. Relatively few endowment mortgages are sold these days due to the huge Endowment miss-selling issues in the past few years; where the endowment policies did not cover the value of the loan

If the investment performs badly, you could face a shortfall on your loan at the end of the repayment period. In the 1980s endowments were very popular and heavily marketed by lenders.

Paying the interest

There are several ways of paying interest on your Mortgages. Here are a few of the most popular.

Variable rates

The interest rate of your mortgage will go up or down depending on the current Bank of England rates. Over the past year interest rates have gone up by over 2% to there current level.

Fixed rates

The interest rate is fixed for the period agreed normally between two and five years. These are good if you think that interest rates are going increase. If rates fall you will be out of pocket. Most mortgage companies will also have a penalty if you move your mortgage away before an agreed time.

You pay a fixed rate of interest, but if rates fall you could have paid a lower rate of interest on your mortgage.

Discounted rates

Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.

Related Links

http://www.moneymadeclear.fsa.gov.uk/products_explained/mortgages.html

http://www.moneymadeclear.fsa.gov.uk/pdfs/mortgages.pdf