What is a mortgage and what types are there?

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There are various different types of mortgages.

When buying or selling a property you may need:

  1. A deposit (when buying a property)
  2. A mortgage (or funds to pay the balance of the purchase)
  3. A mortgage advisor
  4. Patience

Mortgage – What is it and types are there?

A mortgage is gives you the finances to purchase a property.

When you sign up to a mortgage with a lender, you enter into a contract to repay the debt together with the interest and other costs.  If you do not keep up the repayments or fail to pay the debt, the lender has the right to take back the property and sell it to cover their losses.

In effect, you could lose your home, damage your credit rating and you may not be able to buy a new home in the future.

Before you take on a mortgage you should consider whether you can afford it and if you are not that great with money (as some of us are), you may need to improve your chances of getting a mortgage.  Click here for some great ways to do this.

What are the different types of mortgages?

  • Capital repayment
  • Interest only
  • Part and part (a mix of the two)

What is a Repayment Mortgage?

You make monthly repayments for an agreed period to the lender (known as the mortgage term) until the capital and interest has been paid back.  As long as you keep up the payments, the amount you originally borrowed will decrease and the mortgage will be repaid by the end of the term (usually 25 years).  You need to decide whether you want to have the interest rate fixed over a specific period time (which means your payments will be the same every month during the that time frame) or have a variable rate (which means your monthly payments can rise and fall each month) depending on the current interest rate. If you decide to move house or repay the mortgage within the first years, you will find that you have paid mainly the interest.

What is an Interest Only Mortgage?

You make interest only payments for an agreed period to the lender (known as the mortgage term) and at the end of the mortgage term you will still owe the amount you originally borrowed from the lender.  As with the repayment mortgage you will need to decide whether you want to have the interest rate fixed over a specific period time (which means your payments will be the same every month during that time frame) or have a variable rate (which means your monthly payments can rise and fall each month) depending on the current interest rate.

Lenders will want you to have a repayment strategy in place, so that you will be able to pay off the capital at the end of the mortgage.

If you use an investment plan to pay off the capital it is your responsibility to ensure it will pay off the capital at the end of mortgage term.

Your lender may ask for a larger deposit if you want an interest-only mortgage.

What is a Combined Payment and Interest Mortgage?

Some lenders offer mortgages on a part-repayment and part-interest basis.  This means that at the end of the term, you still owe some of the capital and it will need to be repaid.

What is a Buy To Let Mortgage?

A buy to let mortgage is where a lender borrows funds to a borrower in order for the property to be let out privately to a tenant.  A buy to let mortgage works similarly to an ordinary mortgage but the following may apply:

  • The deposit required may be much higher (as much as 25% of the property’s value)
  • The interest rate offered to the borrower may be much higher

Buy to let mortgage’s are usually interest only mortgages which means you pay the capital in full at the end and only pay the interest during the term of the mortgage.