What is a mortgage?

A mortgage is simply a long term loan that you take out to cover the purchase of residential property either for your own occupation or as a buy to let investment purchase. The loan is secured against the property, so if you do not keep up repayments, your home can be repossessed.

What is a remortgage?

It has become much more popular to switch your mortgage before you have finished your current term. This is known as remortgaging. It can be an excellent way to find better rates, save money, consolidate debts or change the way in which you repay your loan.

Standard variable rate mortgages

This is the simplest mortgage type where the interest rate fluctuates with current financial market conditions. Most fixed, discount and other mortgage types eventually revert to a variable rate once any fixed or discount period has elapsed. Very few people now choose this option at the outset of the mortgage as the discount / fixed rate offers provided by lenders usually provide far more attractive terms.

Fixed rate mortgages

A fixed rate mortgage simply means that you will pay the same amount of interest for an agreed time (usually 2-5 years). Often the rates are slightly higher than a variable loan, but they offer the security of knowing that if interest rates go up, your repayments will remain the same. This is one of the most popular types of mortgage as it offers stability by avoiding the risk of a large rise in interest rates upsetting your household budget. However if interest rates fall you won’t see the savings benefit so it can sometimes work against you. When your fixed term ends your payments may rise as you switch to the normal variable rate.

Discount rate mortgages

As the title suggests, these are lower incentivised rates offered by lenders on the standard variable rate to attract new borrowers on board and can be very competitive. However, the rate will revert to a standard variable rate so the buyer must be able to afford the mortgage payments once the discount period has elapsed.

Tracker rate mortgages

Unlike an ordinary mortgage where the lender can set any rate they like, tracker rate mortgages are set at a specific percentage above the Bank of England’s base rate, currently 0.5%, for a fixed period of usually 2-3 years. This means your interest rate will only fluctuate in line with Bank of England rate movements and not those arbitrarily set by the lender.

Capped rate mortgages

A capped rate mortgage is where the lender has set an upper and lower threshold that the interest rate cannot go above or below, and has similar benefits to fixed rate mortgages in that the homeowner will be better prepared to avoid the worst of financially damaging rate increases.

Offset mortgages

Increasingly popular, this type of mortgage works best for those who have regular savings. The primary advantage of such a scheme is that the interest on savings is offset against the interest to be paid on the mortgage, thereby reducing the mortgage payment. This of course reduces the interest paid on the savings account, but this can usually save income tax and often proves most suitable for those on higher income tax bands.

Capital & Interest mortgage repayment method

This is the most popular method of repayment. Your monthly repayment pays off the interest owed and a part of the initial capital borrowed until eventually the entire loan has been repaid in full.

Interest only mortgages

An interest only mortgage allows the borrower to only pay the interest on the loan (with no capital repayments) to keep the monthly payments down in the early years of the mortgage. This type of loan carries a higher risk and advice must be sought on the suitability on this type of repayment method.

Flexible repayment mortgages

This allows you to vary within previously agreed terms the amount you can repay depending on your financial circumstances and can prove ideal for those with fluctuating incomes, for example the self employed.

Government Initiatives

There are several government initiatives available in the UK, such as the LIFT scheme (Low-Cost Initiative for First Time Buyers), Mi New Home scheme (in Scotland only) and the NewBuy scheme (in England only). These schemes have been put in place to help those struggling to save a deposit get onto the property ladder, particularly those who are looking to buy for the first time, by making it possible to secure a mortgage for a deposit as low as 5% of the property value.