Types of mortgages explained
Different mortgage types can seem confusing, so here's a guide to get you started on the differences, limitations and features of some of the more common types – such as fixed-rate mortgages, tracker mortgages and discount mortgages.
What is a mortgage?
A mortgage is a loan to help you buy a property. Whether you’re a first time buyer, remortgaging, moving home or looking for a buy to let mortgage, Nottingham Mortgage Services can help find the right mortgage for you.
Mortgage payment options
What is a repayment mortgage?
With a repayment mortgage you gradually pay off all the money owed on your house, as well as the accrued interest by making monthly payments. Repayment mortgages are sometimes called ‘capital and interest’ mortgages.
At the start of your mortgage term, when the outstanding loan is at its largest, the monthly payment will comprise more interest and less of the mortgage itself. As you get further into the term, you pay a larger loan amount whilst the proportion of your payment made up of interest gets less. You will pay off the whole loan with this type of mortgage by the end of your agreed term.
What is an interest-only mortgage?
An interest-only mortgage is where you only pay off the interest on your loan each month – but you’ll still have the full balance of the mortgage on the property to repay at the end of the agreement. As part of your application, lenders will also usually request details of your repayment or exit strategy so that they know how you will repay the outstanding loan at the end of the term.
Mortgage interest options
What is a fixed-rate mortgage?
A fixed-rate mortgage is where you pay the same rate of interest for an agreed period, after which a new rate will kick in.
- With a fixed-rate mortgage you know in advance exactly what you’ll be paying back each month for a set period of time (your deal), which is usually between 1 and 10 years and sometimes up to 15 years. This is unlike a variable rate mortgage in which the rate can increase or decrease during your deal
- A fixed rate of interest is normally lower than the Standard Variable Rate (the lender's own basic interest rate) and at this time fixed rate mortgages are some of the cheapest ever offered
- You are tied in even if interest rates fall – and would probably have to pay a fee to leave the agreement
- When the fixed period ends, you move onto the reversion rate (the rate you move onto once a deal is finished)
- There will likely be an increase in payments at the end of the fixed term when you are transferred to the reversion rate but this isn't always the case. The other option is to move to a new deal with either the same or a different lender.
What is a Standard Variable Rate mortgage?
A Standard Variable Rate (SVR) is a lender’s default interest rate and is usually higher than most mortgage deals available.
There aren't SVR mortgages as such; Standard Variable Rates are often what you are transferred onto when a fixed-term deal ends, although you may be moved onto a tracked or discounted rate. So it may be worth shopping around if you find that you’re on an SVR.
What is a tracker mortgage?
A tracker mortgage is where your interest rate follows or tracks one of a number of different rates. For example, this could be the Bank of England’s base lending rate. This will be detailed in your mortgage agreement, but if you’re not sure, your mortgage provider will be able to let you know which rate your mortgage is tracking.
- When the tracker mortgage rate is low, you could take the opportunity to overpay each month subject to mortgage conditions.
- Your repayments aren’t dictated just by your lender’s own rate, they are dictated by the one they are tracking
- You won’t know for sure how your payments will change through the set period of the deal, which means that you’ll pay a different amount if the tracked rate changes
- Unless it is a “lifetime tracker”, when the fixed period ends you’ll move onto the lender’s reversion rate
- Tracker mortgages can be capped (so they don’t go too high) or collared (where the rate can’t fall below a set figure).
- Again, there could be an increase in payments at the end of the fixed term when you are transferred to the reversion rate
What is a discount mortgage?
- A discount mortgage is where your interest rate is a fixed amount less than another rate defined by your lender (which could be either the Bank of England Base Rate or the lenders SVR).
- Discount mortgages last for an agreed amount of time, can be capped (so they don’t go too high) or collared (where the rate can’t fall below a set figure)
- Similarly to tracker and fixed mortgages, there could be an increased in payments at the end of the fixed term when you are transferred to the reversion rate.
Other mortgage features
What is a cashback mortgage?
A cashback mortgage is where your mortgage lender pays a lump sum back to you once your mortgage application and house purchase has completed.
What is an offset mortgage?
An offset mortgage is when you have a savings or current account linked to your mortgage. Your savings balance is considered as if you’ve used this as part of your deposit without actually having to do so. You can still spend and top-up your savings but your interest payments on your mortgage will change in line with your savings balance.
A simplified explanation of how this works is, if you had a £100,000 mortgage and £10,000 in savings you would pay interest on £90,000 – you would still need to pay off the entire £100,000 loan.
If you are looking for a mortgage, why not get in touch with Nottingham Mortgage Services and see what they can do? NMS' expert mortgage advisers will search over 60 lenders and thousands of deals to find the right one for you and your circumstances. Get in touch online or call the team of advisers on 0344 481 0013 for expert mortgage advice.
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