There are several different types of mortgage available in the UK and it can be difficult to know which one is right for your situation. First-time buyers are particularly likely to find the options confusing, but even those who are purchasing property for the second, third time or more can find themselves baffled by the terms and jargon.
The first point of difference in property loans is whether you pay back the capital as you go along, or whether you pay only the interest and then have the capital still to pay at the end of the mortgage. These are known as repayment mortgages and interest only mortgages respectively.
With a repayment mortgage your monthly payments pays off some of the capital as well as interest. By the end of the term all the money you owe is paid off. These mortgages give buyers peace of mind that they will be clear of the debt at the end of the deal providing everything goes to plan with their payments.
Interest Rate Mortgage
With an interest only mortgage your monthly payments are only paying back the interest. At the end of the deal you have to find the money from somewhere to pay back the capital. These are usually cheaper each month but more risky as buyers have to make other arrangements to find the money to pay back the capital. Traditionally, endowment policies were used to provide life insurance and save the money to pay back the loan, but these have become less popular because of misselling in the past.
The other main difference between mortgage deals, whether they are repayment or interest only, is how the interest rate is determined. An interest only mortgage carries an element of risk.
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Variable rate means the rate changes in line with the Bank of England base rate but with a buffer added on by the lender. If interest rates fall you will pay less, but if they go up you suddenly have to find more money each month. So the rate moves broadly in-line with the base rate, though the lender is not obliged to carry over the charges.
With a fixed rate the interest rate stays the same for a set period, usually between two and five years. This gives buyers the security of knowing how much their monthly payment will be. However, there can be charges if you want to get out of the deal early. If you have chosen to do this then make sure that the loan is portable and therefore can be carried with you if you decide to change house. Extra borrowing will generally have to be with the same lender.
Capped rates are fixed at the higher end but do allow for lower monthly payments if the interest rate falls.
Discounted rates mean the lender offers a discount off the variable rate, which fluctuates with interest rate changes. There is a set term for the discount so once it is over the monthly payments will go up and buyers must be prepared for this.
An offset mortgage is where the borrower is able to ‘offset’ their savings against the mortgage balance thus reducing the effective balance. So for example a home owner with a mortgage of £150,000 and savings of £50,000 will only pay interest on £100,000. They will not of course receive any interest on the £50,000 savings however they will not have to pay any tax on the interest either.
In 2013 with savings rates at sub inflationary levels, people can save paying interest on typical SVR’s (Standard Variable Rates) of 4-5% compared to earning paltry savings rates of around 1%. Small wonder then that the offset mortgage is the fastest growing mortgage type in 2013.
If you need more information on how a residential home mortgage works, call our expert team on 0800 038 6699 today. We look forward to hearing from you.