What Types of Mortgages Are Out There and Which One Is Right for Me?
Written on 30 July 2018 by
When you begin the process of looking for a mortgage, it’s not a simple ‘one fits all’ solution. There are many types of mortgages that are available, all of which have different purposes. There are so many to choose from that it can become quite overwhelming. Choosing a mortgage doesn’t just come down to the interest rates and fees. It comes down to the whole package, so it is important to know which type of mortgage and what features will benefit you the most.
This post will discuss the different types of mortgages that are available for different requirements and what they are intended for.
How does a Mortgage work?
A mortgage is quite simple. You borrow money to be able to purchase a property which you will pay back, with interest.
There are a variety of different mortgages available for what your requirements are:
- First-time buyer mortgages
- Moving home mortgages
- Buy-to-let mortgages
- Expat mortgages
- Commercial mortgages
- Remortgaging
- Let-to-buy mortgages
- Development finance
- Mortgages for high net worth individuals (Directors, Doctors, Dentists, Solicitors)
- Contractor mortgages
- Self-employed mortgages
- Off-plan mortgages
- Bridging loans
Each client of ours has different circumstances and there is no ‘one fits all’ solution when it comes to our service or the mortgage products we offer. There are four main types of mortgages which we will explore a little further below:
First-time buyer mortgages
Buying your first home is exciting but figuring out how to get onto the property ladder can feel quite complicated and overwhelming.
There is a lot to consider when buying your first home, but most importantly it’s about finding the right home, suitable monthly repayments, and the features of your mortgage that fit your requirements (possibly for the next 25-30 years).
Whether you are looking to use a scheme such as Help-to-Buy ISA, Help-to-Buy equity loan or shared ownership there are options to consider when looking at the different types of mortgages to help you on your way:
● Fixed Rate
● Variable Rate (including Trackers)
● Cashback
● Offset
Repayment Types
● Capital and Interest
● Interest-only
Finding the rate that suits your requirements and your budget is extremely important. By looking at our Mortgage Best Buys for first-time buyers, you’ll be able to see the options available to you based on your circumstances.
View first-time buyer mortgage best buys
When the end of your mortgage period is near, it is a good idea to discuss your options with your broker such as switching to a new mortgage product or remortgaging to a new lender entirely.
Moving home mortgages
You may have been through the process a number of years ago and certain aspects may have completely changed. Whether you are an experienced home mover or this is the first time you’re selling your home, the process can still be just as daunting.
If you are planning on moving home whilst your current product is still running you may well be able to ‘port’ it across to the new property so it can continue without incurring any early repayment charges. This is known as porting and it is subject to the same application process as the first time, so you need to be aware that lending policies and criteria may have changed in the meantime – similarly your circumstances/finances.
Just like with a first-time buyer there are two main types of mortgages available to you for moving home:
● Fixed Rate
● Variable Rate (including Trackers)
● Cashback
● Offset
Repayment Types
● Capital and Interest
● Interest-only
Take a look at our Mortgage Best Buys for home movers to see the options available to you based on your circumstances.
View home movers mortgage best buys
Remortgaging
Remortgaging your home isn’t about moving home, it involves transferring your current mortgage to another lender who would potentially be able to give you a more preferable rate or features (such as ‘offset’). It is also not as much of a hassle as you may think.
Saving money on your monthly repayments or raising some additional money is an option for many who currently have a mortgage. This may be because rates could have fallen since they took their last product or because they are on a ‘standard variable rate’ that is comparatively high.
When considering what remortgage option you want you should to consider all of the deals on offer and the relative advantages of each deal. Mortgages are usually made up of several elements, such as the product and the repayment type, listed below:
Product type
● Fixed Rate
● Variable Rate (including Trackers)
● Cashback
● Offset
Repayment types
● Capital and Interest
● Interest-only
By looking at our Mortgage Best Buys for those looking to remortgage, you will be able to see the options available to you based on your circumstances.
Buy-to-Let
These are for those who want to buy a property and rent it out rather than live in it themselves. Buy-to-Let properties are bought for many reasons; it could be someone’s career choice to be a full-time landlord or, for those looking to diversify their wealth, investing for their future – possibly for pension provision, capital appreciation, or simply just to generate extra income.
Whether you are investing in buy-to-let properties for the potential income or capital appreciation, choosing the right mortgage is essential and there are many options open to landlords:
Product type
● Fixed Rate
● Variable Rate (including Trackers)
● Cashback
● Offset
Repayment Types
● Capital and Interest
● Interest-only
By using a broker who will search the whole of the market means that could save time and money by finding a fit for your requirements. Knowing the different options and criteria is extremely important, for more information, visit our Buy-to-Let best buy tables:
View buy-to-let mortgage best buys
Mortgage Types
When it comes to choosing what you actually want from a mortgage you must consider a few things. First is the repayment method. Do you want interest only or traditional repayment (capital and interest)? Second is the type of rate itself. Is a fixed rate better for you or a variable/tracker rate? Lastly, what features do you need? Is portability important, or offset, or cashback or no early repayment charges at all?
Main Types of Mortgage
Fixed Rate Mortgages
Fixed rate mortgages are extremely popular as they offer stability. This is because the mortgage repayments are fixed over a set number of years (2, 3, 5 or sometimes 10 years) and are not influenced by interest rate changes during that time.
After the fixed rate ends you will be put onto your lender’s standard variable rate (SVR). The SVR is not fixed and will fluctuate depending on mortgage rates and is usually higher than your original product. SVRs have no early repayment charges so you can make lump sum overpayments, or take another product, or remortgage to another lender at any time.
Variable Rate Mortgages
Variable rate is pretty much what it says. It is not fixed so it can go up or down. There are two main versions open to most borrowers. First is a ‘discounted variable rate’ that is a discount off the lender’s own standard variable rate. Second is a tracker rate. This is where the rate charged is the same as the Bank of England base rate plus (or sometimes minus) a set margin.
Cashback Mortgages
A cashback mortgage pays an upfront lump sum back to you when your mortgage commences, thereby allowing you to pay for, say, home furnishings or to repay credit card debts.
Repayment Types
Capital and Interest
The most common type of repayment method is a repayment mortgage (aka capital and interest). Each month your payment is made of interest charged plus some money to go towards the outstanding capital. It is set up such that at the end of the full mortgage term the balance should be cleared if you have made all your payments over the years.
Interest-only
With interest-only mortgages, the agreement is that you pay just the monthly interest on your mortgage amount. This means lower monthly payments but at the end of the agreement you are required to repay the capital you borrowed.
Before taking out this type of mortgage, you will need to prove to the lender that you will have sufficient funds to be able to pay the outstanding mortgage balance at the end. This is known as evidencing a suitable repayment vehicle such as an appropriate investment, ISA, or equity in other properties you may own or possibly even downsizing at the end of the mortgage.
Offset
Offset mortgages are usually suited to those who have, or will shortly have access to, a significant amount of savings. In most cases someone who is running a business or planning to pay for something like an extension. The idea is that the mortgage account has a savings account linked to it. At the end of each day the balance of the savings account is deducted from the balance of the mortgage to create your ‘net mortgage debt’ and it is that lower balance that interest is then charged on.
With choosing this type of repayment, it’s always best to ask your broker about the features and set up of an offset mortgage to ensure you understand all of their complexities.
If you are unsure as to which mortgage is right for you, why not try our What Mortgage? calculator to help you decide based on your own personal circumstances:
https://www.charcol.co.uk/mortgage-calculators/what-mortgage/
For more information about the different types of mortgage or you just simply would like to discuss your options - please contact our mortgage advisers on 0330 433 2927 or fill out our enquiry form online.
Categories: General, Robyn Clark
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.