Different Types Of Mortgages Explained

The sheer amount of personal mortgage products available on the market can be confusing and overwhelming. Below is a quick explanation of each. For buying commercial properties you will require a commercial mortgage. A great resource to read is the commercial mortgage guide visit them to see the guide.

1. Capital And Interest Mortgage

Also called a repayment mortgage,this is the simplest and most common form of mortgage. It consists of a capital amount plus interest that will repaid in intallments over a predetermined period of time or term. Interest is charged only on the capital or the amount that still needs to be repaid.

2. Interest-Only Mortgage

This type of mortgage is normally only used for investment purposes (for instance fix and flip properties). Only the interest on the principal loan amount or capital is repaid every month. The capital is then invested in the property and repaid in a lumps sum at the end of the term of the mortgage usually from the sale of the property.

3. Fixed Rate Mortgage

A fixed rate guarantees that the interest rate on the mortgage will remain the same for a predetermined period of time. This period is normally not for the full term of the mortgage and commonly lasts anywhere between 1 and 10 years. Once the period has expired,the mortgage will switch to a standard variable rate (SVR) or the default rate set by the lender. The interest rate may therefore fluctuate once the fixed rate period has ended.

4. Standard Variable Rate Mortgage

Every mortgage provider sets a default rate that is the standard rate that is offered to all their clients with no special offers,discounts,deals,etc. The rate is often not the best on offer and a discounted rate (Discounted Rate Mortgage) will often be offered for a short period of time after which the mortgage will reset to the default or standard variable mortgage rate. The lender may change the rate as they see fit which may result in a fluctuating interest rate.

5. Tracker Rate Mortgage

This mortgage tracks a particular interest rate – such as the Bank of England base rate – meaning that the interest paid will differ every month. If the base rate increases,so will the interest on the mortgage and vice versa. The lender will add a fixed rate to the base rate that will however not fluctuate.

6. Capped Rate Mortgage

These mortgages are less common as they often result in paying higher interest than with a tracker mortgage. They are a type of SVR mortgage that sets an upper limit on how high the rate can rise.

7. Cashback Mortgages

The lender pays a percentage of the mortgage amount in cash back to the mortgage holder upon signing the mortgage. This is an incentive and often excludes any other discounts or offers from the lender.

8. Flexible Mortgage

These mortgages allow some flexibility in the amount that is repaid on the mortgage every month. The repayment can either be slightly lower or higher than the specified installment. However,the repayment must usually,at a minimum,cover the interest. Some flexible mortgages allow for a payment holiday where payments can be missed for a specified period of time.

9. Offset Mortgage

This allows savings or positive balance in a current account to be offset against the interest that is paid on the mortgage. The savings or current account must be held with the mortgage lender. In other words,interest is charged on the capital amount of the mortgage less the positive balance in the savings or current account.

It is highly recommended to discuss the different types of mortgage options with a mortgage broker to find the most suitable option.

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