Understanding the different types of mortgage
The great news is that there is a vast array of mortgage products available. Whilst this can make the mortgage market seem confusing, this handy guide to Applying for a Mortgage can help you understand what the different types of mortgage are.
An Independent Financial Adviser will be able to explain all your options and find the best deal for you. Ask the Sales Executive at your chosen development for more details about our panel of trusted IFAs.
There are two main kinds of mortgage – Repayment Mortgage and Interest Only Mortgage.
Once you understand the difference between the two, you’ll need to know about Interest Rates.
Repayment mortgages are a standard way of paying off a mortgage.
At the end of the loan period, a repayment mortgage will ensure that you have paid off the mortgage in full and you own the property outright.
With a repayment mortgage you pay some of the loan and some of the interest on the loan every month.
- Capital repayments are payments on the amount borrowed
- Interest repayments pay off the interest on the loan.
The way in which repayment mortgages work are that in the early stages of your mortgage you pay off interest predominately. As the capital is paid off, the borrower pays less interest and more capital.
Interest only mortgage
Interest only mortgages have been extremely popular with first time buyers in the past, but are now quite rare.
With an interest only mortgage, the borrower pays only the interest on the money lent. This significantly reduces the size of monthly mortgage payments.
If they continue to pay only the interest for the entire length of the mortgage term, they will owe the entire value of the loan at the end of the mortgage term.
For this reason, first time buyers sometimes take out an interest only mortgage for the first few years of home ownership, and then switch to a repayment mortgage when they can afford to pay it.
The alternative to switching to a repayment mortgage is to put money into an investment scheme such as an endowment policy each month. At the end of the mortgage term the investment scheme would be used to pay off the mortgage.
The risk with interest only mortgages is that an endowment policy may not be enough to pay off the entire mortgage, leaving the borrower with a large sum to pay off.
You pay interest on top of any loan you take out. So you’ll be paying back both the loan itself and the interest on the loan.
How much interest you pay depends on the interest rate of your mortgage. If you have a small deposit you may end up paying a higher interest rate. Find out about our Deposit Match scheme which can help increase your deposit and so reduce your mortgage.
Here are the main types of Mortgage Rate:
Fixed Rate Mortgages
- Your monthly repayment amount will be fixed for a specified period.
- The rate will not change, regardless of any changes to the lenders standard variable rate or the Bank of England's base rate.
- A fixed rate mortgage scheme will usually last between two to five years
- Once the fixed rate period is over, the interest rate will revert to the lenders standard variable rate.
- If you decide to cancel your mortgage within than time, you may have to pay an early redemption penalty.
- However, some mortgage lenders offer fixed rates with the flexibility to make unlimited overpayments without being charged an early repayment fee.
Variable Rate Mortgage
- A variable rate mortgage is based on the lenders standard variable rate.
- Lenders standard variable rate is affected by the movement of the Bank of England's base rate. Usually variable rates stand at around 1.5%-3.5% above the Bank of England base rate, but they do vary from lender to lender.
- The lender is under no obligation to change the standard variable rate in accordance with the movements of the Bank of England base rate. A tracker rate mortgage will offer this option.
Tracker Rate Mortgage
- A tracker rate mortgage is set a certain amount above the Bank of England’s base rate, so any changes to the base rate will affect a tracker rate mortgage.
- So for example, if the Bank of England base rate stands at 1%, and the mortgage offered by the lender is 1% above base rate, the tracker mortgage rate would stand at 2%, until the Bank of England base rate changes.
- The benefit to the borrower is that all falls in Bank of England interest rates are passed on to them; but on the flip side, all increases are also passed on.
- Tracker rates are particularly attractive if interest rates look set to remain broadly stable or fall during the deal period.
- If you have the flexibility within your personal finances to adapt your payments in reaction to interest payments, you may also feel that a tracker rate mortgage is right for you.
- Tracker rate mortgage periods can vary between 2, 3, 5 or 10 year mortgages, and once the term is up the mortgage will revert to the lenders standard variable rate.
- A discounted mortgage can be a good opportunity for first time buyers.
- They offer customers the option to pay a discounted interest rate for an agreed set period of time, so that they pay a lower monthly amount during the initial years of their mortgage.
- This can be useful for first time buyers who may prefer to spend money on other things during the first years of home owning.
Get some advice
For information on all the options above, we would recommend you speak to an Independent Financial Advisor (IFA) who will be able to offer tailor made advice for your personal situation.
When you buy with Taylor Wimpey, we can recommend one of our tried and trusted panel IFA’s, who will be able to help find the right deal with you. Book an Online Appointment with a Sales Executive at your chosen development for more details.
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