Whether you are a first time buyer or already have a mortgage, the sheer number of mortgages available could leave you a little confused.
At Alliance & Leicester we understand that everyone’s circumstances are different. You may want lower repayments in the early years, or the certainty of a fixed rate. You might want a greater level of flexibility, or you may not have any idea at all! That’s why we’ve produced this handy guide to help you understand the different types of mortgages available.
1. Paying your mortgage back
Despite all the different types of mortgage schemes and deals available, there are still just two basic ways of repaying your mortgage available:
• Repayment mortgage (capital and interest)
• Interest only mortgage
Repayment mortgageThis type of repayment method is also known as a Capital & Interest mortgage - your monthly repayments pay off the interest and some of the capital borrowed each month. This is the only method that ensures your mortgage is totally paid off by the end of the term – as long as you keep up your payments.
Interest Only mortgagesThis is where you only repay the interest on your mortgage each month, so you’ll need some sort of investment plan to pay off the capital, e.g. a pension, an endowment policy, an ISA or other long term investment plan. When your investment matures, you cash in the plan and use it to pay off your mortgage loan. You are responsible for the repayment of the capital when the mortgage reaches the end of the term, and you may want to seek professional advice on the investment.
You can also combine these two methods, called Part & Part, so part of your mortgage would be interest only, and the remaining part would be repayment.
2. Types of mortgage products
Discount mortgagesThe rate of interest you pay is set at an amount below the lender’s standard variable rate (SVR), and the rate you pay moves up or down in line with any changes to the SVR. This type of loan is cheaper than Standard Variable Rate at the start of your mortgage and allows you to take advantage of any interest rate cuts. But if interest rates rise, your monthly payments go up.
Most people find that buying a home – and especially their first – leaves them financially stretched. With the extra expense of decorating and furnishing, anything that keeps costs down in the first years can be a big help. That’s exactly what a discount mortgage does.
The discount you enjoy in the first few years of your mortgage can mean a big saving, and the discount usually means you are tied into your mortgage during the discount period. So, if you change your plans and need to repay your mortgage during the discount period, you will have to pay an Early Repayment Charge. However if you simply want to move house, you can usually take your mortgage with you.
Fixed Rate mortgages The rate of interest on your mortgage is fixed for a set period of time regardless of whether the Bank of England Base Rate or the lender’s Standard Variable Rate changes.
Most mortgages have rates that change over time - and repayments that go up as well as down. This can make budgeting difficult, but a fixed rate mortgage can help. Fixed rate mortgages are suitable for those who prefer to know exactly what their monthly outgoings will be.
There may be minor variations in your monthly payments to cover insurance, but your mortgage interest rate will stay fixed no matter what happens to mortgage rates elsewhere. An Early Repayment Charge may apply if the mortgage is repaid during the fixed period.
Remember, if interest rates fall, you may miss out on a reduction in your monthly payments.
Cashback mortgages You receive a lump sum or percentage of your loan in cash when you complete your mortgage.
Tracker mortgagesYour mortgage interest rate is linked to the Bank of England’s base rate for a set period. So if the base rate goes up so will the rate of interest you will have to pay on your mortgage, but if the base rate falls so will your monthly repayments.
Flexible mortgages This type of mortgage is designed to accommodate your changing financial needs. It may allow you to overpay, underpay or even take payment holidays. You may also be able to make penalty free lump sum repayments.
3. Protect your investment
Don’t forget insurance to make sure your home is adequately insured. We can arrange insurance for your Buildings & Contents and sort out Life & Critical illness and
