Mortgage loans

From Home And Money

There are various kinds of mortgage deal you can take. This is a broad explanation.

Contents 1 Payment types 1.1 Repayment mortgages 1.2 Interest only mortgages 2 Interest rate deals 2.1 Standard variable rate 2.2 Fixed rate mortgages 2.3 Discount rate mortgages 2.4 Capped and collared rate mortgages 2.5 Tracker mortgages 3 Flexible deals 3.1 Offset mortgages 3.2 Current account mortgages 4 Finding a deal

Payment types

The first distinction to be made is between repayment mortgages and interest only mortgages.

Repayment mortgages

With repayment mortgages, you pay interest on the loan amount each month, but you also pay off capital each year so that at the end of the repayment period, such as 25 years, you own the property free and clear.

Interest only mortgages

With interest only mortgages, you pay interest on the loan amount each month, but nothing towards paying off the capital of the loan. Instead, you pay into an investment plan designed to make enough money by the end of the repayment period to pay off the whole of the loan in cash at that point.

Endowment mortgages are interest only mortgages linked to an endowment policy; pension mortgages rely on the lump sum you can take out of a personal pension; and ISA mortgages depend on the tax-free savings you can make in an ISA scheme.

Interest rate deals

The next distinction is between different types of interest rate deal. Using APR is a good way to see what a deal really costs. You often have to pay an early repayment penalty if you try to redeem your mortgage while one of these arrangements is in place.

Standard variable rate

The basic type of mortgage is a standard variable rate mortgage which is a loan at the lender’s standard variable rate of interest or SVR. The SVR is an interest rate which can go up or down depending on interest rates in the market generally, or the lender’s desire to maximise profits (the rate is higher) or attract new business (the rate is lower). The various types of interest rate deal are designed to protect against future increases or fluctuations in a lender’s SVR.

Fixed rate mortgages

With a fixed rate mortgage, the interest the lender can charge is frozen at an agreed rate.

Discount rate mortgages

A discount rate mortgage charges interest at an agreed percentage below SVR.

Capped and collared rate mortgages

If you have a capped rate mortgage, interest can go up or down, but a limit is set on how far up it can go. A variation of this is the collared rate mortgage, which works like a capped rate mortgage that with a limit also set on how far down the interest rate can drop.

Tracker mortgages

Tracker mortgages are like SVR mortgages in the sense that interest can go up or down, without any limit, but the difference is that the rate of interest is linked to an index, Bank of England base rate or LIBOR, so you are not at risk of increases purely due to the lender increasing its interest rate for extra profit. These deals are usually negotiated for a fixed number of years, after which you would need to make a new arrangement at the then prevailing rates of interest. These deals are designed to protect you and, therefore, work against the lender potentially, so there is always a price to be paid as a trade-off for the protection.

Flexible deals

With most loan deals, you take a loan, you pay the agreed interest, and you pay the capital off monthly (repayment mortgages) or at the end of the loan period (interest only mortgages). flexible mortgages are a category of mortgages which offer some flexibility in these arrangements, and different options for the calculation of payments. You can usually pay more money in good times, and then reduce your payments, or stop making payments, or even draw cash back when your finances are tight.

Offset mortgages

offset mortgages allow you to offset your loans and your savings, so you only pay interest on the net amount. With family offset mortgages, this can be extended to include your family’ savings.

Current account mortgages

You can extend the offset arrangement with current account mortgages.

Finding a deal

To find a mortgage loan or obtain the best deal, you should consider using a mortgage broker . You can, of course, go to a mortgage lender direct.

To get a mortgage you must be considered a reliable payer by the mortgage lender. If you are considered not creditworthy, you may not be able to borrow. Most mortgage loans are geared towards lending to people who have a job -- who are employed rather than self-employed - because the amount of the loan is often based on salary. Obviously the self-employed also buy homes on mortgage, but mortgages for the self-employed will involve slightly different criteria on the part of the lenders.