Mortgage Types

Standard variable mortgage

A standard variable mortgage is based on the lender's basic mortgage rate, commonly known as the Standard Variable Mortgage Rate.

It is usually the rate that customers revert to after a fixed, capped or discount period ends.

This mortgage is regarded by some as the least complex mortgage type with the interest rate varying (rising and falling) in response to changes in the UK base rate. The base rate is set by the Bank of England and lenders are free to decide for themselves the amount that they will alter their own interest rates by in relation to these movements in base rate.

Fixed rate mortgages

A fixed rate mortgage provides guaranteed monthly payments for a predetermined period of time.

If you're the kind of person who likes certainty and the reassurance of knowing exactly what your monthly outgoings will be, then a fixed rate mortgage may be most suitable for you.

A fixed rate mortgage sets the interest rate that you will pay for a specified period, guaranteeing the amount payable each month for a fixed length of time.

Once the fixed time period expires your mortgage repayments switch to the mortgage lender's standard variable rate. This arrangement will enable you to more accurately forecast your budget during the initial years of your mortgage term.

In addition, if the interest rate rises above the fixed rate that you are paying, you will actually save money. However, the reverse of this is also true. If the interest rate goes down whilst the fixed rate deal is in place, you will end up paying more.

Capped rate mortgage

A capped rate mortgage puts a maximum limit on the interest rate that you have to pay. You therefore gain the security of having a 'ceiling' or upper limit to the amount that the lender can increase the interest payable on your mortgage.

This period of capped interest is for a specified period only; typically between one and five years. At the end of the specified period your mortgage will usually revert to a variable rate.

However, it is possible to find a capped rate mortgage that can last for the entire life of the loan. Although this arrangement initially sounds attractive, some capped rate mortgages also have a 'collar' or lower limit below which the interest on your loan cannot fall.

Discount rate mortgage

A discount rate mortgage offers a percentage discount from the lender's normal variable rate for a set period of time.

When the standard variable rate fluctuates, the discount will remain fixed, however, the amount of discount and the period will vary from deal to deal.

Discount mortgages are more suitable for people who prioritise low initial payments at the expense of higher rates later on; for example first time buyers, whose income isn't so high who want to have some spare cash to spend on furnishing their new home.

The discount rates last from six months to about five years and generally the shorter the period of discount, the higher the discounted rate will be.

In addition, you should consider that sometimes lenders can attach redemption penalties for remortgaging after your discounted period has ended.

Tracker mortgages

With a base rate tracker mortgage the rate of interest you pay is tied to the base rate set by the Bank of England.

Typically the tracker mortgage rate will be set as a percentage above the base rate and although the resulting interest rate is usually lower than a mortgage lender's standard variable rate, this will vary from lender to lender. A main advantage of a tracker mortgage is that the difference between the variable rate and the base rate is usually a lot smaller than the margin between an standard variable rate mortgage and the bank base rate so you will end up paying less overall.

In addition, if the base rate falls, the interest payments on your mortgage loan will fall accordingly, no matter how low the base rate goes. However, remember that the bank base rate can rise as well as fall which can make budget planning difficult.

Cash-back mortgages

Cash-back mortgages are often aimed at first time buyers and the mortgage lender will offer a lump sum of cash at the start, or sometimes at an agreed point during the term, of your mortgage.

Usually the cash-back is offered as a package of benefits (e.g. linked with a discount) but pure cash-back mortgages are not uncommon. Mortgage lenders may offer a sum of money towards the cost of legal fees or survey charges. This could be, for example, £200 to £1000 as a flat amount, or a percentage of the mortgage loan.

In return, you typically have to agree to take the mortgage lender's standard variable mortgage rate.

Self certification mortgage

Self-certification (self cert) is a simple way of detailing your income without having to provide proof of income - you simply self declare what you earn.

Self Cert mortgages are designed for people whose income is difficult to assess using the standard methods adopted by most conventional mortgage lenders. The specialist mortgage lender will be far more accommodating and they appreciate that different working patterns require a more flexible approach.

Self Cert mortgages have become extremely popular with the changes in work practices in the last few decades; especially for those dependent on bonuses for a sizeable portion of their income or workers on short-term or part-time contracts.

Self certification does have its limits though - most mortgage lenders will only allow you to prove your income in this way if you want to borrow less than 75% of the property's value, so you will need to put down a substantial deposit. However, some mortgage lenders may allow you to borrow up to 85% on a self-certification basis.

Buy-to-let mortgage

Buy-to-let mortgages are for investment properties.

As with regular domestic home loans there are many products on the market ranging from special offer deals to fixed and variable rate loans. With a buy-to-let mortgage some lenders will only consider your rental income when offering a mortgage, while others will place more emphasis on your normal earnings, especially if you only have one or two rental properties.

Your expected rental income must exceed your mortgage repayments by a certain percentage. For example, your mortgage lender may require a rental income of 130% of your monthly mortgage payments. Your lender will also want to establish whether the property you are buying is a good long-term investment. So buy-to-let mortgages are subject to the usual status checks. Generally buy-to-let mortgages are available for between five and 45 years and for up to 80% of the property value.

When considering a buy-to-let it is also necessary to bear in mind any additional costs such as letting agent's commission, insurance premiums for building and contents cover and rental and legal expenses cover, the costs of keeping the property in a suitable condition for letting, service charges and ground rents if the property is leasehold.

100% mortgages

A 100% mortgage loan covers the full value of a property, without the need to put down a deposit.

A 100% mortgage is very popular particularly among first time buyers wishing to get a foot on the property ladder but who do not have a deposit available. While you'll pay more each month in interest you're able to buy a home sooner rather then later.

100% mortgage borrowing is now available to applicants with past bad credit. Previously unavailable, these mortgages now offer you the chance to purchase a property or remortgage at 100% borrowing even if you have impaired credit, for example have missed mortgage payments in the past.

The 100% mortgage is not suitable for everybody's needs and in a falling property market you may end up owing more than your house is worth - "Negative Equity". You should always seek professional advice before deciding on which type of mortgage is most suitable for your needs.

Repayment, Interest-Only, Combined mortgages

Repayment mortgage

A repayment mortgage guarantees your loan is paid off in full at the end of the agreed term.

With a repayment mortgage you make monthly payments that cover both the interest on the loan and the repayment of the loan itself.

This brings the peace of mind of knowing that you are reducing your debt every month.

A repayment mortgage offers the reassurance that once the final payment has been made you will have paid off the mortgage in full (providing all the repayments have been made).

Interest-Only mortgage

With an interest-only mortgage you only pay-off the interest on the loan and none of the outstanding debt until the end of the term.

Your monthly repayments are usually made up of three parts:

Interest-only mortgages usually have lower monthly payments than a repayment mortgage but are inherently more risky. There is no guarantee that the investment plan you choose will generate sufficient capital to pay off the outstanding debt at the end of the mortgage term. However, should your investment be successful, you may be able to pay off your debt and have a lump sum left over, or even clear the debt in advance of the expected date.

Mixtures/Combined mortgage

With a combined mortgage a proportion of the loan is treated as an interest only mortgage and a proportion as a repayment mortgage. Therefore, you will use both repayment and interest-only methods to repay the loan.

If you have an existing investment policy in place before seeking a mortgage you may want to consider this option.

This type of mortgage is most common with people who already have an investment product (an endowment, ISA or pension plan) arranged prior to taking out the mortgage and want to use this to help reduce the additional cost of taking out the mortgage.

It is possible to use an investment policy to repay part of the loan, and then pay the remaining part with a repayment mortgage. For example, if you want to take out a £350,000 mortgage and already have an endowment that could pay out £100,000 in a number of years time, you could consider an interest-only element to cover the first £100,000 and a repayment element for the remainder.

Flexible mortgages

There are many varying degrees of flexibility. In order to be truly flexible, a mortgage must allow borrowers to do the following below:

Some so-called flexible mortgages may only meet a couple of these criteria, while other all-singing, all-dancing mortgages allow you to do much more. So make sure you do your research before you choose the flexible mortgage deal that suits you best.

Overpaying

The vast majority of flexible mortgage borrowers make overpayments on their mortgages. This may seem like a strange concept, but it makes great sense. If you can get rid of your mortgage early you can save yourself tens of thousands of pounds in interest payments. So if you can afford to make some overpayments why not do so? And overpaying by very small amounts can help.

On a £70,000 mortgage charged at 6.20 per cent, giving up a chocolate bar a day and putting the 40p towards your mortgage instead would pay off the debt one year and five months early and save you £4,617 in interest.

And giving up a packet of cigarettes a day and putting eg. £4.20 towards your mortgage would shift the debt nine years and six months early, saving you £28,898.

Underpaying

A truly flexible mortgage will allow you to pay less than the agreed amount - once you have made overpayments. Of course underpaying is not the best idea as it adds to the time it will take to pay off your debt, but it could come in handy in the odd month when your spending is increased.

Payment Holidays

Some flexible mortgage deals allow you to take a complete break from making mortgage payments for up to a year. This could be useful if you're thinking of starting a family, taking a sabbatical or even going on the cruise of a lifetime. Of course, you have to have built up sufficient overpayments to cover the period you take off. And the terms and conditions will vary. Some mortgage lenders may only let you take a couple of months' payment holiday each year. So check first if you think you might want this option.

Borrowing Back

Borrowing back overpayments you have made makes perfect sense if you need extra cash. The beauty of mortgage overpayments is that rather than putting any spare cash into a savings account and earning a couple of per cent interest on it, because the amount you over pay is taken off your mortgage you are effectively earning the mortgage rate on your savings. And, with the borrow back facility, it's as though your money was in an instant-access savings account earning that rate. So if you want to buy something costly, or you run into unforeseen expense, the money is at hand.

Redemption Penalty

Redemption penalties do not apply to regular standard variable rate loans - you should be free to chop and change between variable rate loans when you choose as they are not the most competitive rates available. When flexible mortgages were first introduced you could only get them on variable rate loans, so redemption penalties did not apply. Plus while a traditional mortgage lender could charge you a fee if you wanted to pay off a lump of your mortgage (because they had calculated for you paying interest on that lump for a set number of years), that flew in the face of the flexible concept, which actively encourages people to pay off their mortgages as early as possible. Now there are some deals that are truly flexible but do carry short-term redemption penalties. These may be fixed rates or discounted rates, where redemption penalties apply during the special rate period.

Calculating Interest Daily

Fully flexible mortgages have interest calculated daily, and any payments and overpayments are credited to your mortgage account as soon as they are paid, so you are immediately paying interest on a smaller amount of debt. This saves you money in interest charges that would otherwise add up to a significant sum over a number of years. Traditionally, mortgage interest was calculated and applied annually in arrears, so you would be paying interest on the same amount of debt all year, even though you had been gradually decreasing it during that time.