It might not be obvious for someone who is looking to get a mortgage for the first time, but there are many different types of mortgages. There are lots of factors to consider when choosing a mortgage and which lending scenario will work for you.
All mortgages work in the same way, in the simplest way, you pay back what you borrow plus interest.
Here are a few different mortgage options and how they work.
Repayment Mortgage:
With a repayment mortgage, you pay back the capital (the amount borrowed) and the interest on the loan each month. This is the most common mortgage type in the UK. If you keep up your monthly payments you will eventually own your property outright.
Interest Only Mortgage:
With an interest-only mortgage, you only pay back the interest on the loan each month and not the capital. You will have to make sure you can find another way to repay the capital at the end of the mortgage term. This is usually through the sale of the property. At the end of the term, the original loan amount must be paid in one lump sum. In recent years interest-only mortgages on residential properties have become much less common.
Tracker Mortgage:
On a tracker mortgage, the interest rate is set at a certain percentage above the Bank of England base rate. For example, if the base rate is 1% and your tracker mortgage has an interest rate of 4%, then your actual interest rate would be 5%. One main advantage of a tracker mortgage is that they usually start off with a lower interest rate. However, once the term is over the interest rate will revert to the lender’s standard variable rate.
Fixed Rate:
A fixed-rate mortgage has an interest rate fixed for a specified period. The main benefit of this is that your monthly repayments will stay the same during this time even if interest rates rise. However, like a tracker mortgage, once the fixed rate ends, you will be put on the lender’s standard variable rate, which could be higher.
With a fixed rate mortgage, your monthly payments are fixed for a period, the most common being two or five years. There are also longer fixed periods available should you wish to look into this.
Bad Credit Mortgage:
Whilst not necessarily branded a ‘bad credit’ mortgage, these products, and the lenders who specialize in them, offer terms like a regular repayment or interest-only mortgage. However, the products are likely to come with high-interest rates and there could be a lower limit on how much you can borrow based on the lender’s specific criteria.
This is because having a low or poor credit score or even certain ‘blips’ on your report means you can be viewed as someone who is a high risk by the lender. You might be asked to come up with a larger deposit of at least 20-25% rather than 5-10%.
Retirement Interest Only Mortgage:
This type of mortgage is aimed at older borrowers who may struggle to get a mainstream mortgage due to age limits. With a retirement interest-only mortgage you repay the interest on your loan monthly. You don’t have to repay the capital until you die or go into long-term care. Then your home is sold, and the lender is repaid from the proceeds. When applying for a retirement interest-only mortgage you are not subject to the same affordability checks. Lenders will just check if you can afford to repay the interest, not the capital you have borrowed.
There are still many more mortgage options out there, such as…
- Equity Release
- Buy-to-let mortgages
- Capped-rate mortgages
- Discount mortgages
- Flexible mortgages
- Guarantor mortgages
- Joint mortgages
- Offset mortgages
- Standard variable rate mortgages
- 95% mortgages
Here at Agentis, we understand everyone’s circumstances are different, which is why we take the time to understand everyone’s situation and help advise you on the best mortgage to suit you. Get in touch today!
