There are many different types of mortgages available on the market, and it can be confusing trying to work out which one is right for you. In this article, we’ll take a look at different types of mortgages there is, to help you make an informed decision on which one is for you.
Interest only vs repayment mortgages
Most mortgages fall into the category of either interest only or repayment mortgages. So, the first thing to consider is whether you want an interest only mortgage or a repayment mortgage.
Interest only mortgage:
With an interest only mortgage, you only pay the interest on the loan each month. This means that your monthly payments are lower, but you’ll still owe the full amount of the loan at the end of the term. So, you need to make sure you able to do this if you choose this type of mortgage.
Repayment mortgages:
This type of mortgage is the most common type. This type of mortgage is when you pay a bit of the capital which you have borrowed and part of the interest on the loan you had.
With a repayment mortgage, your equity will build up and your loan is gradually repaid over time. This means you will eventually own the home. If you was to decide to move home then your options are to port your mortgage over, take out a new mortgage or pay off the amount left on your loan.
Fixed rate vs variable rate mortgages
Fixed rate mortgages are a popular option. This is because with a fixed rate mortgage, the interest rate is fixed for a set period of time, usually between two and five years. This means that you’ll know exactly how much your monthly payments will be during this time, making budgeting easier.
However, with a fixed rate mortgage if interest rates fall you won’t benefit as you will still have to pay the fixed rate you agreed to. Also, once your fixed-rate deal finishes you will be moved over to a standard variable rate (SVR), which are usually higher. Therefore, some people decide to try and remortgage.
A variable rate means that your interest payments can go higher or lower as they are not fixed. The rates are slightly the same as the Bank of England’s, however, they also follow their own criteria. Therefore, your rate can be increased even if the Bank of England’s rates don’t rise. There are different types of variable rate mortgages which we will go explain below.
Types of variable rate mortgages
Standard variable rate:
A standard variable rate is the basic rate a mortgage lender will use. Once a fixed, discount or tracker mortgage rate finishes then your lender will put you on a standard variable rate. As mentioned above the rates can change each month, so you could end up paying higher rates some months and lower rates another.
Discounted mortgages:
Discounted mortgage rates are usually only available for a limited time, so it’s important to compare deals before you commit. With a discounted mortgage, the interest rate is discounted for a set period of time, usually between one and five years. This means that your monthly payments will be lower during this period. Howver, you’ll need to make sure that you can afford the higher payments when the discount period ends.
Tracker mortgages:
Tracker mortgages follow the Bank of England base rate, meaning that your monthly payments can go up or down depending on the base rate. So, you need to consider this one carefully as you will need to be able to afford to pay the monthly payments if the rates rise.
Capped rate mortgages:
Capped rate mortgages work in a similar way to fixed rate mortgages, but with an upper limit on how much the interest rate can increase. This can give you some peace of mind if interest rates are expected to rise in the future.
Other mortgage options
Flexible mortgages
A flexible mortgage offers more flexibility than other mortgage types. They often allow you to make overpayments or underpayments without penalty. This can be useful if your income fluctuates or if you want to pay off your mortgage early.
Offset mortgages
This type of mortgage is suitable for someone who has a good amount of savings. This is becuase an offset mortgage is when you pay interest on the difference between the mortgage you have and your savings. For example, if you had a £225,000 mortgage and the savings your had was £20,000, then the amount you would pay interest on is £205,000.
Offset mortgages gives you flexibility as you can still access your savings and you can choose to pay lower monthly payments or pay the same amount each month. However, offset mortgages usually have higher rates compared to standard mortgages.
Help to buy mortgage
Help to Buy mortgages are available to first-time buyers and those looking to move up the property ladder. With a Help to Buy mortgage, you can borrow up to 20% of the purchase price of your new home from the government, with no interest to pay for the first five years.
Joint mortgage
Joint mortgages are available for those who want to buy a property with another person. This can make it easier to get a mortgage if you don’t earn enough to qualify for a mortgage on your own. Something to remember with a joint mortgage is whoever’s name is on the agreement is responsible for paying. So, only have a joint mortgage with someone you trust to pay the payments.
Summary
Hopefully you now understand the different types of mortgages there is and know which one would be better for you. Remember to compare the different deals to ensure you get the right one. In addition, before choosing, if you would like to know more about mortgages such as what to consider before applying and tips to get your mortgage approved you can read our blog post here.
