Types of Mortgages

Capital & Interest (Known also as Repayment Mortgage)

Monthly payments are made up of interest charges on the amount borrowed and a portion of the capital to repay the mortgage. During the early years most of each month’s payment is interest and it is only later that you start to repay any significant element of capital.
The ADVANTAGES of this type of mortgage is that as long as you keep up your monthly payments the mortgage is guaranteed to be repaid at the end of the term.

Interest Only Mortgage

Monthly payments to the lender consist of only interest and the outstanding mortgage remains the same. You will need to provide some alternative way of repaying the mortgage such as an ‘ISA’ or other investment.
Some people use this type of mortgage to reduce their monthly payments in the early years when their finances are usually tighter, and then convert to a repayment mortgage later on to ensure they repay the mortgage by the end of the term.
This type of mortgage is also often used to fund the purchase of an investment property, where the purchaser is more interested in capital growth rather than regularly repaying the mortgage.

Lifetime Mortgages

This type of mortgage is available to retired homeowners and can be used to provide a lump sum or regular income. The interest is usually at a slightly higher rate than normal. The interest due on the mortgage is rolled up and added to the mortgage thereby increasing the debt. This type of mortgage can allow people to still enjoy or improve their property, although their retirement income may not normally qualify for a mainstream mortgage scheme. Borrowers should ensure the mortgage is ‘Safe Home Income Plan ’ qualifying as this adds some safeguards for the borrower. Many retired people have a substantial amount of equity in their property which they may prefer to use to improve their income or quality of life.
The DISADVANTAGE of this type of loan is that the debt will increase over the period of the mortgage and may in some cases severely reduce the amount of equity they can pass on to their heirs.

THIS IS A LIFETIME MORTGAGE. TO UNDERSTAND THE FEATURES AND RISKS, ASK FOR A PERSONALISED ILLUSTRATION

Fixed Rate

The monthly payment is fixed over an agreed period of time and will remain the same regardless of whether interest rates rise or fall.
This is particularly beneficial to borrowers who want to know what their payments will be for a given period, or first time buyers who have stretched their budget and don’t want any nasty surprises if rates increase.
At the end of the fixed rate term the interest rate usually reverts to the lender’s standard variable rate or you may be offered the choice of another product, on the terms available at that time.

Variable rate (SVR)

The monthly payment fluctuates in line with the lenders mortgage rate. This can cause budgeting problems in times of increasing interest rates. Some lenders offer an annual review so the amount you pay only changes once a year with the difference adjusting your outstanding mortgage. Lenders may also offer a version where your monthly payment fluctuates in line with the Bank of England Base Rate, often referred to as a ‘Base Rate Tracker’.

Capped Rate

The interest rate is guaranteed not to go above a certain level throughout the capped rate period, which can usually be from one to ten years, but you will benefit from any reduction in interest rates.

Collared Rate

The interest rate will not fall below a certain level for the collared rate period. This is often combined with the capped rate.

Discounted Rate

The lender offers a true initial discount for a given period. This discount is usually expressed as a percentage off the Lenders standard variable rate. Therefore if rates rise your payments will increase and if they reduce your payments will reduce in line with the specific rate change. During the period of the discount the interest rate you pay will remain at a discount to the standard variable rate. At the end of the discounted period the rate usually reverts to the Lenders Standard variable rate. No interest is deferred so the outstanding mortgage will not increase.

Cash Back

Some lenders offer a cash payment on completion of the loan, either based on a percentage of the total loan or a flat amount.

Flexible Mortgages

These schemes allow you to overpay, underpay or even take a payment holiday. Any unpaid interest will be added to the outstanding mortgage. Any overpayment will reduce your outstanding mortgage. Some schemes have the ability to draw down additional funds to a pre-agreed limit. These schemes can be on fixed or discounted or any of the other types of interest rates.

Libor Linked (LIBOR)

This is the rate at which banks and large companies lend to each other the ‘London Interbank offer rate’ this is usually less than the Bank of England Base rate. The rate is set once per quarter on quarter days. And will therefore only fluctuate 4 times per year. Some mortgages can be expressed as ‘Libor Linked’ or ‘Libor trackers’. Some lenders will offer mortgages at a percentage over LIBOR rate. Your payments may therefore increase or decrease in line with the quarterly movements in this rate.

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