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Understanding different mortgage types

BY READERS DIGEST

1st Jan 2015 Property

Understanding different mortgage types

With thousands of different mortgages on offer, tracking down the best mortgage for your needs can be a challenge, but understanding your options will help you to make a more informed decision.

Types of mortgages

Mortgages fall into two main categories:

Repayment mortgages, where your repayments go towards the amount of money you borrowed and the interest charged by your lender. These mortgages are less risky than interest only mortgages because, provided you keep up with your repayments, you will have repaid all of the money you borrowed by the end of your mortgage term.

Interest only mortgages, where your repayments go towards the interest only. At the end of the mortgage, you will need to repay the money you borrowed in a lump sum. Usually, you will draw this money from a savings or insurance policy you invested in at the time of taking out your mortgage.

Interest rates

The cost of your mortgage will depend on the interest rate, so as well as deciding on your repayment method, you will need to look at the interest rate deals on offer. These may include:

  • Standard variable interest rate, where your payments go up or down with your lender's standard interest rate. This interest rate is usually influenced by Bank of England base rate changes.
  • Standard variable interest rate with cashback, where you pay the standard variable interest rate detailed above and receive a cash lump sum that you can use to pay for expenses such as legal fees or stamp duty.
  • Discounted interest rate, where you pay a lower interest rate to begin with then move onto another interest rate, usually the lender's standard variable interest rate, after a fixed period.
  • Tracker interest rate, where you pay an interest rate that is linked to a base rate, such as the Bank of England base rate. This interest rate will go up or down in line with changes to the base rate, so if the base rate rises by 1%, your interest rate will rise by 1%.
  • Fixed interest rate, where you pay a fixed rate of interest for a set period. When the fixed rate period ends, you will usually move onto the lender's standard variable interest rate.
  • Capped interest rate, where you pay a variable interest rate, but your lender guarantees that the interest rate will not go above a certain amount for a set period. After this period, you will usually move onto a fixed or standard variable interest rate.
  • Cap and collar interest rate, where you pay a variable interest rate, but your lender guarantees that the interest rate will not go above or below a certain amount for a set period. After this period, you will usually move onto a fixed or standard variable interest rate.

Comparing mortgage deals

If you are looking to compare mortgage details, a mortgage calculator will help you to gauge the approximate monthly repayment charges associated with the various mortgages on offer to you. However, it is important to remember that a mortgage calculator may not include any extra costs, such as associated investment policies in the case of an interest only mortgage, in its calculations.

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