What is a mortgage and what types are there?

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What is a Mortgage and What Types Are There?

A mortgage is a secured loan taken out to purchase a property.  Most mortgages run for around 25 years, but it can be longer or shorter depending on which lender you choose and your budget.

When you sign up to a mortgage with a lender, you enter into a contract to borrow money secured on a property.  The lender will charge you interest, and you must clear the balance at or before the end of the term.  If you do not keep up with the mortgage repayments or fail to repay the debt, the lender has the right to repossess the property and sell it to cover their losses.  Anything leftover from the sale proceeds would be passed to you.

Before taking out a mortgage you should work out what you can afford as well as looking at the different types of mortgages.  Also, you don’t want to end up struggling to make payments because you didn’t take into account the general costs of running a home.

What Are the Different Types of Mortgage?

Repayment Mortgage

With a repayment mortgage, you make monthly repayments for an agreed period, which cover both capital and interest on your loan.  As long as you maintain your full mortgage payments for the full term, your mortgage is guaranteed to be cleared in the end.  This mortgage type is favoured for normal residential mortgages.

Interest-Only Mortgage

With an interest-only mortgage, your monthly payments to the lender only cover the interest on the loan, not any of the capital.  At the end of the term, you’ll then be expected to clear the outstanding loan.  With this type of mortgage, lenders usually want you to have a repayment strategy in place to ensure that you’ll be able to pay off the capital at the end of the term.  An ISA, investment fund, pension or equity in any other properties are good examples of repayment strategies to offer lenders.

Offset Mortgage

With an offset mortgage, you link your mortgage account to a savings account.  Your cash savings are then used to ‘offset’ against your outstanding mortgage balance.  Your interest is then calculated on the net balance between the two accounts.

Buy-to-Let Mortgage

A buy-to-let mortgage is for landlords who want to buy a property to rent it out.  A buy-to-let mortgage works similarly to a residential mortgage, but the differences may include:

  • The minimum deposit required can be much higher, usually at least 25% of the property’s value
  • The interest rate offered to the borrower is usually a bit higher

Buy-to-let mortgages are usually arranged on an interest-only basis which means you only make interest payments each month and repay the capital in full at the end often by selling the property.

What Are the Different Types of Mortgage Interest Rates?

Fixed-Rate

The interest stays the same for a number of years, usually between two to five years.

Variable Rate

The interest that you’re paying can change.  There are different types of variable-rate mortgages.  For example, a tracker rate moves in line with the Bank of England’s base rate by a set margin, that tends to remain the same for the initial product period.  This type is unaffected by the lender’s standard variable rate.  Another type of variable rate is a discounted variable rate, which is where the lender gives you a discount from their standard variable rate for a set number of years.  Then there’s the actual standard variable rate which is the rate lenders put everyone on once their initial product has ended – unless you remortgage away to another lender or take a new product with your current lender.

Find further how-to guides:

Improve your chances of securing a Mortgage
Improve Your Credit Score
Buy a Property for the First Time
Buy and Sell a Property at the same time
Buy a Council Property
Re-Mortgage a Property
Reduce your Mortgage Payments
How to Extend a Lease Agreement
Insurance you need for a Property
Become a Landlord
Improve your Property to Sell
Insurance
Surveyors
Conveyancing Solicitor
Mortgage Finder

 

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