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Types Of Mortgages
100% Mortgages - is where the mortgage lender loans
the full amount that the property costs. (if the house costs £200,000 you borrow £200,000)
which means you need to put no capital of your own down. Normally you'd only get a loan
to value mortgage between 75% to 95% (eg if the home cost £100,000 a 75% mortgage
means you borrow £75,000). The problem with getting a 100% mortgage is:
- It will probably cost you more as you'll be charged a higher interest rate.
- You may get tied in long term
- You'll be relying on property prices continuing to rise. If they fall you'll be in negative
equity
- You'll likely have to pay a mortgage indemnity guarantee policy. This only helps
the lender and doesn't help you.
Base Rate Tracker - A base-rate tracker is actually
just a mortgage with an interest rate that tracks the Bank
of England’s base lending rate.
These deals can last for a few years, reverting to the lender’s standard variable
rate after that or they can be for the whole mortgage term referred to as a lifetime tracker.
For example, you may find a mortgage deal with the interest rate set at base rate plus 0.25
per cent for two years, or base plus 0.75 per cent for ‘life’.
Most lenders set their variable rate at about 2 per cent over base, so effectively this
is a type of discounted deal.
Every time the Bank raises or lowers its base rate, your interest rate will change by exactly
the same amount.
Bad Credit Mortgages - In the past few years
a growing number of mortgage brokers and lenders have started specialising in bad credit
(aka "adverse credit") situations. Please see our Bad
Credit Mortgage page for more information on this HOT TOPIC!
Buy to Let Mortgages - traditionally, lenders
only offered loans for people buying homes. An growing number of lenders are now offering
loans for a property you want to "buy to let", (eg, not to live
in, but to rent or let out to tenants). Getting additional income from rent is seen as a
good investment by some and is becoming more common. These loans are popular with retirees
and investors looking for cheap and effective loans to manage the purchase of investment
property. Read more information and find some excellent lenders and buy to let tools on
our Buy
to Let page
Cash Back Mortgages - These deals vary but, as the name
suggests, you get cash on top of the money you will be borrowing. You can use it to pay
for moving costs, furniture, taxes, fess etc. Cashback deals are in reality an incentive
to get you to borrow from a particular lender. It's rarely a genuine offer and
is probably used to tie you in with the mortgage lender who finds a way to make the money
back anyway. So you are really just borrowing more! If you need extra money it may be better
to shop around to look for better deals from your bank, credit card etc.
Capped Rate Mortgages - are supposed to offer the best of
both variable and fixed rate mortgages. You agree to a limit - a cap -
on the maximum amount of interest you will pay over a period of time while allowing the
rate to fall if the variable rate drops. Best points: You get the best of both worlds. If
the variable rate rises higher than your agreed capped rate then you're only paying up to
the agreed capped rate. Whereas if it falls below your capped rate then you pay less as
well. Therefore you benefit from falling interest rates but are protected from rate rises.
Bad points: There's only a limited number of capped rate deals on the market and they're
not considered to be competitive as the interest rate you'll be paying is going to be higher
than your average fixed or discounted rate mortgages. There is most
likely to be a admin fee that has to be paid.
Current Account Mortgage - is a relatively new type of mortgage
product which goes that little bit extra than the usual flexible mortgages. The mortgage
account effectively becomes your bank account. You get a chequebook, direct debit facility,
credit & cash card and regular statements etc. Your earnings are paid straight into
this "mortgage bank account". This means that you pay less interest on your mortgage because
your earnings are being used to pay back the loan.
Discounted Rate Mortgage - is an interest repayment type
of loan. To attract new customers most lenders will offer a new borrower a discount on
their standard variable rate, for a limited period. Your payments will rise and fall, as
with a standard variable mortgage, but you're paying less. After the agreed limited period
the interest rate will switch into the mortgage lender's usual variable rate. Always check
the lenders track record or you could end up paying against the odds. One way to combat
this is finding a loan that will let you change your lender to take maximum advantage of
the discount periods. The penalties for changing to another mortgage lender may last longer
than the agreed discount term. But they're usually less than for a fixed rate period. Good
thing is you're paying less money but! you're locked in for the
agreed term so if the interest base rate goes up you're stuck. However when the period ends,
you can move along to the next best discount rate.
Equity Release Mortgage - are for homeowners with or without a mortgage
who want to release some equity their home to give themselves a cash lump sum. This means
that if you have paid off a significant amount of your mortgage and/or property prices have
risen, you can benefit from some of the profit (known as equity) that is locked into your
house without having to sell your home. Lenders provide a variety of services for doing
this, but they are generally described as "equity release" mortgages.
Generally you will be able to borrow up to 95% of the equity in your home, given to you
in a lump sum which you then pay back like a normal mortgage. This can be used to pay for
almost anything you want.
WARNING! Be cautious of equity release mortgages. For some reason they are unregulated by
the Government which means your money is at risk if you end up with a rougue trader.
Fixed Rate Mortgages - is a mortgage where you and the mortgage
lender agree to fix the interest rate owed on your loan for a limited
period. This is usually between 1 and 5 years or more. (dependant on the exact
mortgage deal you choose). After the agreed period, the interest rate owed on your loan
usually reverts to the lender's Variable Rate. You know exactly
what you'll owe with no surprises but if interest rates drop you may be paying more than
you could have done if you had gone for the Variable Rate. As interest rates might rise...
At least you're not gambling with your own home. If you want to exit before the agreed term,
the early redemption penalty could be quite high. e.g. you could be charged six months gross
interest if you leave a five-year fixed rate agreement. Some penalties could even exceed
the fixed-rate period. This would be an overhead redemption penalty. Just be clear on what
you are getting.
Flexible Mortgage - the idea of a flexible mortgage is that
you can change your monthly payments to suit your circumstances without penalty charges.
This can include making regular to occasional top up payments, making underpayments or taking
a payment break. It is even possible to draw cash on the loan. In the past, flexible loans
usually carried a higher interest rate than normal. Be sure to check the small print and
shop around for a deal as you may find a better deal.
Interest Only Mortgage - This is an scheme where you only
pay off the interest on the loan. Unlike a normal mortgage where you would pay the capital
and interest on the loan. This means most people can borrow more on their mortgage and still
maintain a reasonable monthly repayment. However, the capital debt needs to be repaid by
the end of the mortgage term by having made simultaneous payments into a separate investment
fund. The idea is that this fund has hopefully grown enough to pay off the capital and leave
a surplus. In today's investor market, many landlords take this type of loan and rely on
positive cash from renting and appreciation on the property to pay back the lump sum.
Offset Mortgage - This type of loan confuses
many people with the perceived complicity. In reality, its a great way to save money!. The offset
mortgage works by counting the money you have in your current or savings accounts against
the money you don’t in your mortgage to reduce what you owe. Interest is not earned
on your money but you can get it back any time you want, but the great thing is you don’t
pay any interest on the equivalent amount of mortgage debt.
Repayment Mortgages - The traditional type of mortgage which
remains the only way property is actually guaranteed to be yours
at the end of the mortgage term provided the loan had been paid back in full. Your debt
is divided into capital repayments and interest payments. As you pay off
your mortgage every month you pay a bit of capital and a bit of interest until the debt
is full repaid. Most of the interest is paid off in the early years and then gradually more
of the capital debt is paid. It may seem as if this is costing more but that's because unlike
the other types of mortgages you're paying off the capital and the interest at the same
time.
Remortgage - Remortgaging is to switch your existing mortgage
to another mortgage lender in order to lower the amount you're paying on your mortgage
which is usually achieved through new borrower discount deals or a period of low interest.
You do not have to stick with any lender for the full term.
Remortgaging can save you lots of money so is well worth looking into if you have not already.
It is even possible to pull a little cash out of the equity in your home at the same time.
Search for the best deals around and even try your current lender who may offer you a deal
in order not to loose your business. This type of mortgage can be referred to as a "2nd
charge mortgage" or mortgage
refinancing. Watch out for early redemption charges!
Self Cert Mortgage - A mortgage scheme for those who find it difficult to
prove or show document ion their source of income such as the self employed. The scheme
is also used by many people who have been rejected or offered unsatisfactory home loans.
Although self certification mortgages are often associated with self-employed
people, they are available to people from all walks of life, regardless of their employment
status. To get a self cert mortgage, all you have to do is sign a declaration of your ability
to pay the loan, your bank accounts are not checked or your employment status. You only
have to undergo regular credit checks to qualify.
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