Types of Mortgages
How do I know what mortgage I need?
If you take out a loan to purchase a property this is known as a mortgage. This loan will be for a fixed period and you will have to pay interest on this loan. If you do not keep up with the agreed payments, the mortgage lender can take possession of the property.
There are different types of mortgage and it can get confusing deciding which the right mortgage is for you there are many good independent mortgage advisors, it is wise to take advice.
Here are some of the Mortgage Types-
Repayment Mortgage a EUROS The capital borrowed is repaid over the period of the loan. The capital is paid in monthly installments along with the interest. The amount of capital being repaid is gradually increased over the years and the amount of interest decreases.
Endowment Mortgage a EUROS Consists of two parts i) the loan from the lender and ii) and an endowment policy taken out with an insurance company. You pay back the interest on the loan to the lender, but not the actual loan itself, in monthly installments. The endowment policy is paid monthly to the insurance company. At the end of the policy mortgage, the policy matures and produces a lump sum which should be enough to pay off the original loan amount back to the lender, and maybe and additional lump sum. There is the risk that the endowment policy will not be worth enough to pay off the loan at the end of the mortgage period.
Pension Mortgage a EUROS Primarily for self-employed people. The monthly payments consist of interest on the loan and contributions towards a pension scheme. When the borrower retires there is a lump sum to pay off the loan amount and provide a pension.
ISA Mortgage a EUROS You pay the interest to the lender and contribute to an Individual Savings Account (ISA) which should pay off the loan.
Fixed rate - Where the interest rate remains constant for a set period of time, typically for 2, 3, 4, 5 or 10 years. Longer term fixed rates (over 5 years) whilst available, tend to be more expensive and therefore less popular than shorter term fixed rates.
Capped rate - Where 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 rate are often offered over periods similar to fixed rates, e.g. 2, 3, 4 or 5 years.
Discount rate - Where there is set margin reduction in the standard variable rate (e.g. a 2% discount) for a set period; typically 1 to 5 years. Sometimes the discount is expressed as a margin over the base rate (e.g. BoE base rate plus 0.5% for 2 years) and sometimes the rate is stepped (e.g. 3% in year 1, 2% in year 2, 1% in year three).
Cashback mortgage - Where a lump sum is provided (typically) as a percentage of the advance e.g. 5% of the loan.
To make matters more confusing these rates are often combined: For example, 4.5% 2 year fixed then a 3 year tracker at BoE rate plus 0.89%.
With each incentive the lender may be offering a rate at less than the market cost of the borrowing. Therefore, they typically impose a penalty if the borrower repays the loan; this used to be called a redemption penalty or tie-in, however since the onset of Financial Services Authority regulation they are referred to as an early repayment charge.
Self Cert Mortgage - Lenders usually use salaries declared on wage slips to work out a borrower's annual income and will usually lend up to a fixed multiple of the borrower's annual income. Self Certification Mortgages, informally known as "self cert" mortgages, are available to employed and self employed people who have a deposit to buy a house but lack the sufficient documentation to prove their income.
This type of mortgage can be beneficial to people whose income comes from multiple sources, whose salary consists largely or exclusively of commissions or bonuses, or whose accounts may not show a true reflection of their earnings. Self cert mortgages have two disadvantages: the interest rates charged are usually higher than for normal mortgages and the loan to value ratio is usually lower.
100% Mortgages - Normally when a bank lends a customer money they want to protect their money as much as possible, they do this by asking the borrower to pay a certain percentage of the loan in the form of a deposit.
100% mortgages are mortgages that require no deposit (100% loan to value). These are sometimes offered to first time buyers, but almost always carry a higher interest rate on the loan.