Mortgage types

There are two types of mortgage on the market today; capital repayment and interest only. In the first case, repayments cover both interest and the loan itself; in the latter, interest is paid to the lender and the loan itself is repaid by alternative means, for example through an investment vehicle such as an endowment or savings plan.

However there are many different products. We will, of course, explain your options to you personally, but the following guide may help you see what options you might be able to consider.

Don’t worry about the number of choices to be made; Cleddau Financial Services aims to help you find the right one to suit your current needs and circumstances.

Variable rate mortgage
This type of mortgage has an interest rate payable that can rise and at the lender’s discretion and is likely to be influenced by market conditions. It thus involves a degree of uncertainty as monthly repayments can vary.

When a variable interest rate goes up, the monthly payments will increase.

Buy-to-let mortgage
This is normally a mortgage arranged on property that is intended to be let to other people and not occupied by the owner. There are also buy-to-let mortgages where only part of your home is let. Rates are generally higher than for ‘owner occupier’ mortgages.

The Financial Services Authority does not regulate some aspects of buy-to-let mortgages.

Capped rate mortgage
Some mortgages can be arranged on a variable rate, but where the rate will not (for an agreed period) rise above a set level. They can, however move up and down below that level.

At the end of the capped period the loan will revert to the lender’s standard variable rate which means the customer’s monthly payments are likely to increase.

Capped rate products may have early repayment charges within or beyond the capped rate period.

Cashback mortgage
Some mortgages offer customers a lump sum on completion of the mortgage, perhaps to meet legal and removal charges. The amounts involved can sometimes be quite substantial but there is usually a ‘tie-in’ period during which the full amount of the cashback may have to be repaid to the lender in addition to any other early repayment charges applicable if you cancel the mortgage.

Discounted mortgage
Some mortgages offer a set percentage lower than the standard variable rate for a specified period for a set period. This is not a fixed rate; the cost will simply be a set percentage lower than the normal rate. In many cases, an early repayment charge will apply if you cancel the mortgage, even if this is some time after the discounted period has ended.

This involves a degree of uncertainty as monthly repayments can vary. At the end of the discounted period the loan will revert to the lender’s standard variable rate which means the customer’s monthly payments are likely to increase.

Fixed rate mortgages
Fixed rate mortgages apply for a set period and ensure that borrowers know precisely how much their monthly mortgage payments will be for that time, irrespective of how interest rates may change. You should be aware that, if interest rates generally fall below the rate being paid, the fixed rate continues to apply for the agreed period. At the end of the fixed rate period the loan will revert to the lender’s standard variable rate which means the customer’s monthly payments are likely to increase.

Fixed rate products may have early repayment charges within or beyond the fixed rate period.

Offset mortgage
A recently introduced mortgage product (originating from Australia) allows those with savings to offset the interest due on their mortgage against interest they would have received on those savings held with the same bank or building society.

This is a slightly complex arrangement and normally only applies to those who have substantial savings, a good regular income (perhaps with occasional bonuses) and who may require greater than usual flexibility over repayments. They are generally only favoured by the more financially astute individual.

Re-mortgage
Some people may wish to alter their mortgage even through they are not moving, perhaps because they wish to try to secure a better interest rate, or in order to raise additional finance for home improvements or other purposes. This is called a re-mortgage and is a growing part of the home purchase market.

You may have to pay an early repayment charge to your existing lender if you remortgage.

Tracker mortgage
The interest rate for this type of mortgage reflects the changes in a specified base rate, usually Bank of England base rate. This means that every time the Bank of England base rate changes, the rate on the tracker mortgage is guaranteed to change by the same amount during the tracker period. This involves a degree of uncertainty as monthly repayments can vary, however it may be suitable for customers who wish the mortgage to mirror market conditions for a specified period.

So if, for example, your mortgage is tracking at 0.5% above base rate and the Bank of England move its rate from (say) 5.75% to 5.5%, your mortgage rate will fall from 6.25% to 6%.

There may be a delay between the change in the base rate and the time this is applied to the mortgage. Tracker products may have early repayment charges within or beyond the tracker period. Some tracker products may revert to the lenders standard variable rate after a specified period which may mean that the monthly payments will increase

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