There are times in our life where we’ll often find that we don’t have enough money at our disposal. This commonly occurs when we’re trying to buy ourselves a new home to live in as opposed to renting one, as houses can be rather costly.
Normally, if we’re in need of money, we could just simply apply for a loan and pay that back over time. However, when we’re talking property and real estate, then the loan in question is instead referred to as a mortgage.
Your immediate thought must be “all I need is a mortgage”, isn’t it? Well, as true as that may be, saying “I want a mortgage” is no different than saying “I want to eat a cake”. How so? Just like with cake, there is no single type of mortgage.
There are dozens of different options available for you to choose from. At the end of the day, it’s up to you to decide which mortgage you feel is best for you to apply for, especially if you believe your income is likely to change.
Let’s check out what types of mortgages are available:
1. Repayment mortgages
The most basic type of mortgage, a repayment mortgage involves you paying back the money you’ve loaned along with the interest on the capital that you have left. By the end of the mortgage term, you would’ve paid it back entirely. Any additional money you have to pay is also referred to as ‘the capital’, which is why repayment mortgages are alternatively known as capital and interest mortgages.
Most mortgages and loans require you to pay back the mortgage or loan itself in instalments, often on a monthly basis. As the name implies, an interest-only mortgage means that you only need to pay back the interest that is generated from the mortgage itself, which will be lower than what you’d normally pay. By the end of the term, you’ll need to pay back what you borrowed as part of your full balance.
3. Fixed-rate mortgages
Continuing with the topic of interest, the reason a fixed-rate mortgage is named as such is because of how the interest rate you’ll be paying back will never change. Deal periods that last either two or five years are the most common when it comes to these types of mortgages; with the latter often being the most popular one chosen by those who were seeking out a mortgage, to begin with. When that fixed term comes to an end, you’ll be transferred to your lender’s standard variable rate (SVR).
4. Variable rates mortgages
To say that you want to have a variable rate mortgage is perfectly fine, but it’s not as straightforward as that. Why? You’ll find that there are actually two different types of variable-rate mortgages, both of which function differently than the other. These are:
Type 1: Tracker Mortgages
Tracker mortgages – This is named as such because of how your interest ‘tracks’ the Bank of England base rate. This will mean that you’ll need to pay that on top of your current interest rate. Let me explain:
If your interest rate is 4%, and the Bank of England’s base rate is 0.5%, then you’ll be paying 4.5% total.
Normally, the tracking lasts as long as the introductory period that will often come with it (say, for example, three years) and then you are moved onto your lender’s SVR, but some trackers last for the entirety of your mortgage’s term.
Type 2: Discount Mortgages
Discount mortgages – While you’ll still pay the lender’s SVR, a discount mortgage – as the name implies – means that a fixed amount does not have to be paid back whatsoever.
If, say, the lender’s SVR was 5%, and the discount is 2.7%, you’d only need to be paying 2.3% at a time. These can be ‘stepped’, meaning that you’ll be paying one rate for an initial amount of time before you pay a higher one later during the deal.
These rates will vary in percentage. However, rest assured when you agree to a variable rates mortgage, you’ll be made aware that rates will be capped and kept within a certain range (or, ‘collar’) so that they don’t fall or rise outside of your agreement.
5. Capped rate mortgage
These are a variation on a variable rate mortgage, but the only difference between them is that a capped rate mortgage (but especially a discount mortgage) is the implementation of a cap on how high the interest rate can rise. Normally, you’ll find that the interest rate will be higher than a tracker mortgage and will be needing to pay extra. However, these types of mortgages are seldom seen nowadays.
6. Standard variable rate mortgage
This mortgage dictates that the lender will issue their own SVR and they will set it at whatever level they want, which means that it won’t be linked directly to the Bank of England base rate at all. Keep in mind that lenders can change their SVR whenever they wish to, which would obviously mean you’ll be finding that you need to pay more suddenly; this may especially be the case if the base rate of the Bank of England is speculated to increase in the future.
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This article covered only a small handful of the types of mortgages that are available. If you’d like to dive deeper into the topic of mortgages, or would like some other financial advice about another topic altogether, contact as Count today.