What Types Of Mortgage Are There?
It can be quite confusing to get your head around a mortgage. There are various things to get your head around: the different types of product, and the jargon that surrounds them.
The most profound difference to understand is that you can pay back the mortgage in two different ways. The first is via a product called a Repayment Mortgage
and the second is via a product called an interest-only mortgage
With a repayment mortgage, over a period of years (typically 25) you pay off the whole amount of the mortgage bit by bit, typically with monthly payments. So, after the end of the mortgage, you have paid it all off.
With an interest-only mortgage, you just pay back the interest on the mortgage, rather than also paying back the actual sum you borrowed. This means your mortgage payments are much less, but at the end of the mortgage term you will have to then pay back the whole mortgage sum. Therefore you'll need some plan in place to work out how to save that huge sum over the term of the mortgage.
So, there are two main types of paying back the debt: as you go along (repayment) or all at once at the end (interest-only).
There are also two main types of mortgage itself: these are the fixed rate
and the variable rate
With the former, the rate of your interest stays the same for a specified agreed term: this is usually somewhere from 2-5 years. With a variable rate product, the interest rate you pay can change, typically as a result of the Bank of England changing interest rates.
Each product type has advantages and disadvantages. We go into these in more detail elsewhere, but briefly, a fixed rate mortgage gives you the peace of mind that you always know what your monthly payments are. However, if interest rates fall, you won't see the financial benefit, and in addition you generally have a slightly higher interest rate than variable rate deals. But if interest rates rise, then you also don't have the downside.
With a variable rate mortgage, you don't have the certainty of knowing what your payments are every month like you would under a fixed rate deal. But you can benefit from lower payments if rates fall, but then higher rates if they go up.
There are usually various different types of repayment mortgage product offered, these include the most common SVR - standard variable rate - this is the normal interest rate offered by the bank or building society. There are also discount mortgages - a special reduction off the SVR for a limited time often to get you into a mortgage product, before the rate reverts to SVR after a set period of time.
Other product types include tracker mortgages - moving directly in line with the Bank of England base rate, plus a set amount to give the bank its margin.
Yet another type is the offset mortgage: here the more savings you have the better in terms of reducing interest: the money in your savings and current account is linked to the mortgage you have, and whilst you don't get interest on your savings, that balance is used to reduce your interest. Let's say you have a £150,000 mortgage and £20,000 of savings. You are then charged interest on £130,000 (which is £150,000 - £20,000). Therefore this could help you pay back the mortgage more quickly.
There are full details on the various different types of mortgage product in other articles in this section of the My First Property website.
Last update: 09 May 2015
More first-time house buying articles:
- Budgeting & Saving Tips
- Key Questions To Ask at a Property Viewing
- Dealbreakers When Buying A House
- How to Get on the Housing Register
- Pros & Cons of Living in a Flat