Mortgage Questions

Frequently asked mortgage questions and answers . . .

What different types of mortgage are there?

Although there are many different mortgage deals on the market, generally they can be split into three basic types:

• Repayment mortgage: Under these arrangements you are required to make monthly payments wich are made up of part capital and part interest. Payments often remain the same across the term of the loan. The structure of the repayment method normally means that during the early years of the mortgage, little capital is repaid. The rate of repayment accelerates over time. Repayment mortgages are normally quite flexible as it is sometimes possible to extend the term of the loan but only with the written permission of the lender. Also, it is normally possible to increase the capital repayment of the loan so decreasing the term, allowing you to repay your debt early

• Interest only: These arrangements do not require that you make capital repayments until the end of the loan. The monthly payments to the lender are made up entirely of interest on your outstanding debt. In order to clear capital, at the end of the loan term, you must have an amount equal to the outstanding debt. Most people achieve this by making regular contributions to a savings plan; this plan is targeted to accumulate an amount sufficient to repay the outstanding debt at the end of the mortgage term. Any such savings plan (e.g. Endowment Assurance or ISA plan) should be kept under regular review

• Flexible: These are a newer style of mortgage arrangement. They offer you the option to increase or decrease your monthly payments (and sometimes even the opportunity to stop them altogether for specified periods. This flexibility is designed to assist you to manage your cash flow. Many flexible mortgages offer daily or monthly calculation of interest. This system could normally be expected, when compared with a more traditional mortgage, to reduce the overall amount of interest you pay throughout the loan term.

The latest addition to the mortgage range is a combined system of current, savings and mortgage accounts. The mortgage element will still be a repayment, interest only or flexible loan, but the amount of money in your current and/or savings accounts are taken into account considered when the lender calculates the interest due on your mortgage.

For example if you hold a savings account with a balance of £1,000, this amount will be considered by the lender when calcualting the interest due by effectively reducing the total mortgage by a amount equal to you savings. Such arrangements are known as offset mortgages.

You may also find a 'drawdown' mortgage, which is helpful if you have a property that requires renovation. You receive a basic amount, but as you complete renovation work on your home, further amounts become available for you to draw down as and when required.

Further differences occur in the way interest is calculated on your mortgage:

• Variable: the interest rate you pay rises and falls in line with the bank base rate

• Fixed: the interest rate is fixed for a given time at the start of your mortgage normally from 1 to 5 years although this can be longer. Note that you may have to pay a higher interest rate when the fixed period finishes

• Discounted: the lender gives you a discount on its standard variable rate for a given time

• Capped: the interest rate is guaranteed not to rise above a certain percentage, but it may also have a 'collar', i.e. it will not fall below a certain rate

Different lenders will offer you different incentives to take out a mortgage with them, for example:

• Cashback: on completion of your mortgage, you will receive a cash lump sum

• Payment of some or all fees: the lender provides you with an allowance to cover the cost of things such as survey, legal fees, or may even meet the stamp duty charges

Please note where immediate offers such as these are provided it is common for lenders to charge you a penalty should you repay your mortgage during the early years of its term.