Different Types Of Mortgage Products have their own benefits. More Than Money looks at the different types of mortgages available on the market today.
In this article I’m going to explain in detail all the different types of mortgage products and what makes them different from each other.
With so many choices out there, finding the right mortgage product for your personal circumstances can be difficult.
But once you know what’s what, narrowing down your choice will become much easier.
If you’ve read my article, What Is A Mortgage?, you’ll know that all mortgage types work in the same way.
You borrow money to buy a house and then pay it back, with interest, over an agreed length of time.
How much you pay back each month isn’t just determined by how much you borrowed, your rate of interest, or how long the term of your mortgage is.
It’s also affected by whether you have an interest-only mortgage, or a repayment mortgage.
So what’s the difference between the two?
What Is A Repayment Mortgage?
A repayment mortgage is the most common type of mortgage, and is also sometimes known as a Capital and Interest mortgage.
Every month you will pay back part of the amount you have borrowed (the capital), along with the interest you owe that month.
By the end of your mortgage term you will have paid the amount you borrowed – and the interest.
Now you own your home outright.
Well done you!
What Is An Interest Only Mortgage?
As the name suggests, with an interest-only mortgage you only pay the interest you owe each month, but none of the loan amount you borrowed (the capital).
You only pay off the capital at the end of the mortgage term.
Interest-only mortgages are only offered to those who can prove to the lender that they have a savings plan or funds in place to cover this capital at the end of the mortgage.
The advantage to this type of mortgage is that your monthly payments will be much smaller.
But, as I said, you’ll need to have enough money saved up by the end of your mortgage to repay what you have borrowed.
Therefore this type of mortgage is not suitable for the vast majority of homeowners.
So, what about the different types of mortgage products that are available to you? There are 2 main types:
- Fixed Rate Mortgages
- Variable Rate Mortgages
Variable rate mortgages can then be broken down into another 3 subsections of mortgage type, but don’t let that confuse you just yet.
Let’s start with fixed rate.
What Is A Fixed Rate Mortgage?
As you’ve probably guessed, fixed rate mortgages are where you pay a fixed rate of interest for a set amount of time.
This typically ranges from 2 to 10 years, but sometimes longer.
The good thing about this is that your monthly mortgage payments will be the same every month, even if interest rates increase.
Of course the downside is that if the interest rates fall, you are locked into your fixed rate.
Another downside is that if you want to pay your mortgage and switch to a new deal before your fixed rate comes to an end, there will normally be early repayment charges.
What happens after the fixed rate period ends?
Well then you will normally move onto your lender’s Standard Variable Rate, which is likely to become more expensive.
I would suggest starting to shop around for a new deal if you know your fixed rate deal is coming to an end within the next few months.
Many lenders will allow you to secure a new deal in advance, which means you’ll be able to switch as soon as your current rate ends to avoid moving to the higher payments.
You may also be interested to read our article “What Happens When My Fixed Rate Mortgage Ends?“.
What Is A Variable Rate Mortgage?
A variable rate mortgage is a mortgage where the rates are, well, variable (not a lot of imagination went into naming these did it?!).
This means that your monthly payments can go up or down over time.
Most lenders will still have a Standard Variable Rate (SVR), like a fixed rate mortgage, which will be the rate they charge when the mortgage deal comes to an end.
BUT, there won’t be any early repayment charges if you want to switch from your lender’s SVR to another lender’s.
As I said earlier, when it comes to variable rate mortgages there are several different types.
These are:
- Tracker Mortgages
- Discounted Rate Mortgages
- Capped Rate Mortgages
What Is A Tracker Mortgage?
A tracker mortgage is one that tracks the Bank of England base rate, as well as a set percentage, for a certain amount of time.
When the Bank of England’s base rate goes up, your mortgage rate goes up too.
If the base rate falls then your rate will fall.
Before you get too excited you should know that some mortgage lenders will set a minimum rate below which your interest rate can’t drop, but, as you can probably guess, there’s no limit to how high it can go.
An example of a Tracker mortgage product could be a lender offering 2% above the Bank of England’s base rate (which is 0.75%) for the first 2yrs.
Therefore the interest rate charged initially would be 2.75%.
At the end of the first 2yrs in this scenario your mortgage interest rate would revert to the lender’s variable rate.
At the end of your two years, you can switch to a different type of mortgage, e.g., another Variable rate mortgage or even a fixed one.
What Is A Discounted Rate Mortgage?
Mortgages with a discounted rate offer you a reduction from the mortgage lender’s standard variable rate for a certain amount of time.
Normally this is about two to five years.
This sounds great, but because these types of mortgages are linked to the standard variable rate, your rate will go up and down as the SVR goes up and down.
What Is A Capped Rate Mortgage?
Again, this is a type of variable rate mortgage, so the rates can go up and down.
But, there is a limit, or a ‘cap’ to how high your interest rate can rise.
This can be reassuring because it means that your repayments can’t go too high, but you can still benefit when the rates fall.
The downside of having this type of security is that the interest rates do tend to be slightly higher than discounted or tracker rates.
Also, there is usually an early repayment charge if you pay off your mortgage and then decide to remortgage.
Ok, so that covers the two main types: fixed rate and variable rate (and its different types), but what other types of mortgage products are available? Let’s take a look…
What Is An Offset Mortgage?
An Offset Mortgage allows you to offset any savings you may have against your mortgage.
This means that instead of earning interest on your savings you will be charged less interest on what you owe on your mortgage.
Because of the reduced interest charge you will be able to choose to either reduce your monthly mortgage payments…
Or, keep your monthly payments as they are so that you can reduce the length of your mortgage by paying it off more quickly.
Because you won’t be earning interest on your savings you won’t pay tax on them and can take them out at any time, and offset mortgages can have fixed or variable rates.
What Is A Buy To Let Mortgage?
Buy to let mortgages are for people who want to buy a house to rent out rather than live in it themselves.
First time buyers will find it harder to get this type of mortgage, but it’s not unheard of.
The amount you will be allowed to borrow is based on the amount of rent you are expecting to receive as well as your income and personal circumstances.
And so there you have it.
With so many options you will definitely be able to choose a mortgage product that suits you and your circumstances, it’s just a case of shopping around for the best deal.
The mortgage market can be complicated to navigate – but More Than Money makes it easy!
So feel free to drop us a line if you want more advice.
We are always more than happy to help.
Did we answer what different types of mortgage products are available?
If not, give me a call and I would love to offer you one on one personal advice.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Some buy to let mortgages are not regulated by the Financial Conduct Authority.