Mortgages Demystified

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There are two main types of mortgages in the UK

They are repayment mortgages and Interest only mortgages.. You then have mortgages which serve a purpose for different circumstances such as a first time buyer mortgage or a buy to let mortgage. And you have several methods of paying back your mortgage and the interest owed .

This can become a bit confusing, but let’s demystify it all for you below.

 

UK Repayment Mortgages

 

A repayment mortgage is a term generally used to describe a mortgage in which the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest. The mortgage statement, usually received annually, shows that the amount borrowed decreases throughout the term.

The big advantage of a repayment mortgage is that at the end of the mortgage term, the full amount of the debt has been repaid. It also removes the risk of having an investment, the performance of which is dependent on the stockmarket. The borrower is less likely to suffer from negative equity because the mortgage balance will be reducing month on month.

As time moves on, the equity percentage in the property increases. However, in the early years the bulk of the mortgage repayments consist of the interest component, so not much of the capital is actually paid off for some time.

UK interest-only mortgages

Interest-only mortgages are popular ways of borrowing money to buy property in the UK that is unlikely to depreciate much and which can be sold at the end of the loan to repay the capital. For example, second homes, or properties bought for letting to others.

The less popular mortgage types are below:-  

  • Endowment mortgage –  an interest only mortgage where the capital is repaid by one or more endowment policies at the end of the mortgage term. This are rare now,  if at all available, because of some problems with endowment schemes in the past.
  • An investment backed mortgage – an interest only mortgage where the capital is repaid with the proceeds of a PEP or ISA or other investment plan at the end of the mortgage term. (Note: PEPs are no longer available to new investors). Sometimes these are referred to as PEP mortgages or ISA mortgages
  • Pension mortgage where the tax-free cash lump sum of a personal pension scheme is used to repay an interest-only mortgage at retirement.

There are then the types of Mortgage Interest rates you can choose from..


Types of interest rate

  •  Variable rate – the rate varies at the discretion of the lender.
  • Standard variable rate – the default variable rate the lender offers to mortgage borrowers with a standard residential mortgage.
  • Tracker rate – a variable rate that is linked to an underlying public interest rate (typically Bank of England repo rate) by a predetermined margin. For borrowers the rate is often linked to the LIBOR.
  • Fixed rate – the interest rate remains constant for a set period; typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and/or have more onerous early repayment charges and are therefore less popular than shorter term fixed rates.
  •  Discount rate – where there is reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
  • Capped rate –  similar to a fixed rate. The interest  rate cannot rise above the cap but can vary beneath the cap. Sometimes there is a collar associated with this type of rate which imposes a minimum rate. Capped rates are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.

It would be wise to discuss your options with a mortgage advisor click here 

And finally here would be the mortgage types to suit circumstances.
 

  • Buy to let mortgage – a semi-commercial mortgage on residential property let to tenants.
  • Right to buy mortgage – a mortgage arranged under the right to buy your home legislation for council or housing association tenants.
  • Let and buy mortgage – you let your existing property and buy a new property with a mortgage.
  • Flexible mortgage – allows additional capital payments without penalty and often allows payment holidays or underpayments.
  • Non-status mortgage – a mortgage where the borrowing is not dependent on the income of the applicant and the applicant states they can afford the repayments.
  • Offset mortgage – a mortgage where the borrower can reduce the interest charged by offsetting a credit balance against the mortgage debt.
  • Foreign currency mortgage – where the debt is transferred to one or more foreign currencies to reduce capital and interest payments through fluctuation in exchange rates.

Get some advice about the right deal for you..