Mortgages

Mortgages come in a variety of types, each one tailored to meet the needs of different groups of people. While initially this choice can be confusing, it doesn't take long to understand the key differences, and the benefit is that there is going to be a mortgage type out there that fits your needs perfectly.

We want you to understand your options, as we feel that this puts you in a better position to get a mortgage that you are truly happy with, the following information has been compiled to give you an easy way to see what the different types of mortgages offer.

Fixed Rate Mortgages:

This is a very basic type of mortgage. The interest rate is set when the mortgage is arranged, and remains at that level for the duration of the repayment term. As the interest rate is constant, the monthly repayment amounts can also be fixed, so no matter what happens with the economy, the borrower will always repay the same amount each month until the principal is repaid.

Variable Rate Mortgages:

With this approach, the interest rate charged on the loaned amount is based on the Bank of England Base Rate. The rate is set at a certain premium above the base rate, and will rise and fall in line with the Base Rate. A fall in the Base Rate would therefore lessen the monthly repayments, whereas a rise would see an increase. The premium (the amount above the Base Rate at which the interest is charged) on this type of mortgage is generally lower than any of the other mortgage types.

Capped Rate Mortgages:

This is a hybrid of the above two mortgages. Its rate of interest tracks in line with the Base Rate and so any fall in this would reduce the cost of the mortgage, similarly any rise would increase the cost - but only up to a point. This is the difference between this and variable rate type, the 'cap' sets the maximum that the interest rate is allowed to hit, protecting the borrower from large rises in the Base Rate. It is common capped rate mortgages to begin with a fixed rate period before they start tracking the Base Rate.

Flexible Mortgages:

A relative newcomer to the mortgage market, this variation allows the borrower a certain degree of control over what they repay each month. The specifics vary between providers, however in general there will be a defined 'standard' monthly repayment amount, amounts less than this are classed 'underpayments', amounts over are classed as 'overpayments'. Borrowers are allowed to make underpayments in certain circumstances, and overpayments at any time they like. The former will lengthen the mortgage, the latter will clear it quicker and so reduce the cost.

Interest Only Mortgages:

These are mortgages whereby the borrower only pays the interest charges on the amount borrowed each month, the principal (the amount borrowed) remains the same for the life of the mortgage. The borrower therefore has to make other arrangements in order to raise the money needed to clear the principal at the end of the term. Interest only mortgages can be fixed, variable or capped rate.

Repayment Mortgages:

This is a mortgage with which the monthly repayments cover the interest charges as well as a portion of the amount borrowed. Once the term of the mortgage is over the full amount borrowed will have been repaid. Repayment mortgages can be of fixed, variable or capped interest rate.

Endowment Mortgages:

A special kind of mortgage, this is one that combines interest only repayments with an endowment policy, which will mature once the mortgage term is up. The proceeds from the endowment are used to repay the principal borrowed, although in some cases there may be a shortfall if the endowment investment doesn't perform as expected.

Zero Deposit Mortgages:

Often referred to as 100% mortgages, this is a type of mortgage that is particularly suitable for first time buyers, as it does not require the borrower to put down a deposit - something which many new buyers find hard to get their hands on. The repayment type can vary on these, interest only is a popular option however as most people taking on this type of mortgage are looking to get the very minimum overall costs.

Choosing between these options will require you to put some thought into your financial situation, and what you want out of your mortgage. We hope that this guide has cleared the muddied waters for you and given you a better understanding of the UK mortgage market.

If there are still some points that you are unclear on, then please feel free to contact us.