Review of Mortgage Types

There are a variety of mortgages available to suit your circumstances. The mix of different types of mortgage vary due to the way interest is calculated or on the type of person, property or deal to be done.

Mortgage Types Based on Interest Charges

• Offset Mortgages are set up so that any money you have on deposit or in a current account with your mortgage lender is set against the sum you borrow before interest is calculated. The rates may be slightly higher but the capital sum attracting interest is generally lower.
• Interest Only Mortgages are as they say in the name. The capital is only repaid at the end of the mortgage. You need a clear plan on how the capital will be repaid before you can get an interest only mortgage. They fell out of favour over the last 5 years.
• Tracker Mortgages have an interest rate that moves or tracks a published base rate. A 3% over base will cost 3.5% when the base is 0.5% but 9% when base is 6%.
• Discounted rate deals are less common but there are short term reductions on the rate of interest you pay initially. The rate increases later to offset your earlier discount
• Fixed rate or Variable rate can apply to most forms of mortgage. In one the interest rate is fixed for a number of years or occasional the length of the mortgage. The variable interest rate can ‘track’ or be set on specific terms.

Mortgages for Special Circumstances

• Low Deposit deals generally cost more in interest charges and possibly fees. 5% deposits were common until recently but are now very hard to find
• No Fees Mortgages have the costs wrapped up into the capital sum being borrowed. You just borrow more to cover the costs or pay a higher interest rate to provide a profit for the lender who is standing the fees.
• Remortgages or second mortgages may cost more as the lenders risk is increased. The circumstance of each loan will dictate the basis of the mortgage.
• Buy to let mortgages to acquire a house with a view to rent out will require a good deposit and possibly a higher interest rate (this may be set against rental income for tax purposes.) There are specialist lenders for this market.
• First Time Buyer are set up to encourage home ownership. Government incentives are sometimes available and short term discounted rates may be on offer.
• Equity release schemes are designed to free up a capital sum for the owner that will be repaid on death.
• Self certified mortgages were common for the self employed until the FSA got worried about over statement of income leading to default. Special deals need to be done for those in business but without an obvious regular income.

Finance Blog Comments

• Mortgages are a complex business and we advocate care is taken.
• Too many products on the market can only confuse the borrower. The vast range of products has reduced since the ‘crash’ but the offers available are still hard to compare and contrast.
• We like the Kiss mortgages where the lenders have ‘kept it stupidly simple’. If in doubt get a full explanation from your potential lender.
• Fees can be a big part of the overall cost of a mortgage. This is especially true if you regularly change from one mortgage method to another.