There are two main types of mortgage with many variations within each:
Repayment mortgages - you pay a regular amount, which covers both the interest on the mortgage and the repayment of the borrowed capital. Repayment terms are usually between 15-25 years.
Interest-only mortgages - you only pay the interest on the money you borrow. You will normally be required to invest money separately, with the aim of repaying the borrowed capital in one lump sum at the end of the mortgage term.
Within these two methods, there are a number of different options and products available. The cost of the mortgage depends on the interest rate and there are three main methods of determining interest rates for mortgages:
Variable - the interest rate set by the lender is determined by the Bank of England's base rate. It is set higher than the base rate – usually by about 2% - and as the base rate goes up and down the lender may apply the changes to your mortgage rate.
Tracker rate - the interest rate follows an external tracker, such as the Bank of England Base Rate or the London InterBank Offered Rate (LIBOR). Any change made to those rates is applied instantly to your own mortgage rate.
Fixed rate - the amount of interest you pay is fixed by the lender for a period of time after which it reverts to the lenders variable rate.
Additional options and deals can also be applied in conjunction with the above or as entirely separate products, these include:
Capped Rate - the interest rate you pay will not go higher than the agreed capped rate during an agreed initial period, but may rise or fall beneath the capped rate in line with the lenders variable rate.
Discounted Rate - the interest rate will be at a rate lower than the lenders variable rate for a fixed introductory period so that payments are relatively low at the start of the term to attract customers. The rate goes back to the lender's variable rate once the introductory period is up.
Flexible mortgage : A flexible mortgage is an increasingly popular product that allows more flexibility in mortgage repayments. Overpayments, underpayments and payment holidays are all available subject to conditions. Regular overpayments can significantly shorten the overall length of a mortgage. Underpayments and payment holidays can allow breaks in repayment when needed.
Offset mortgage : An offset mortgage takes into account your savings when determining the interest on your mortgage. Any savings held are deducted from your mortgage borrowing, leading to lower interest repayments.
Current Account Mortgage (CAM) : A CAM is similar to an offset mortgage, but in this case your mortgage and current account are merged together. Your income is usually required to be paid into this new account, with the any savings in the account deducted from the total of your mortgage. This can lead to lower interest repayments for disciplined savers, and therefore a mortgage that is paid off earlier.
A beginners guide to mortgages is available at the following links:
For more information on mortgage repayment options and mortgage interest rates follow this link.
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