Understanding different types of Mortgages.

 

Our straightforward guide to the types of mortgages available to you. We hope this guide helps you decide which mortgage could be best for you.

Your mortgage is likely to be your biggest financial commitment. It's therefore important that you know what your choices are before you sign on the dotted line.

Take a look at the types of mortgages available and see which one is right for you and your needs. You can 'mix and match' in most cases.

 

Repayment
Interest Only
Endowment
Pension
ISA
Variable Rate
Discount Rate
Base Rate Tracker
Fixed Rate
Flexible Rate
Lifetime Mortgage (over 60s)

 

Repayment

The most common type of mortgage is the repayment mortgage. Offering the greatest simplicity, your monthly repayments cover both the capital and interest on the loan, so that at the end of the term you have nothing more to pay.

No other investments are required, but it makes sense for you to consider taking out life assurance in case you die before the mortgage is paid.

 

Interest Only

Your monthly repayments cover the interest - not the capital - of your home loan. The full amount of the loan is repaid by putting additional funds in long-term investments, many of which currently come with tax advantages.

Unlike a repayment mortgage, the amount of debt does not reduce over time and there is no guarantee that your chosen investment will cover the cost at the end of the term. However, you can normally top up your investments if you think this will be the case. There are several options to repay the capital of your home loan:

 

Endowment

With this repayment option, you pay the interest on your home loan to the lender, plus additional payments to an insurance company to fund a savings plan which aims to generate sufficient funds to pay off the capital at the end of the mortgage term.

The savings plan can be 'with profits', where bonuses are paid either annually or at the end of the term, or 'unit linked', where the value is determined by the underlying value of the investment upon maturity. Both options have the potential to provide more than is needed to pay off the loan, giving you extra capital at the end of your mortgage.

You can maintain your policy if you move house or re-mortgage your current property and the life assurance aspect of the endowment policy makes sure that the loan is clear if you die before the term is complete. However, the performance of your endowment is determined by the strength of the investment and you may have to review the policy to make sure that sufficient funds are available to cover the loan at the end of the agreed term.

 

Pension

With this repayment option, you pay the interest on your home loan, plus additional payments to a personal pension fund, to provide a tax-free lump sump to pay off the home loan amount.

This type of mortgage is highly tax efficient and you can currently qualify for up to 40% tax relief. However, because the lump sum is payable upon retirement, your loan term may be more than 25 years, depending on your age and your planned retirement age. Poor performance of your fund could also result in insufficient funds being available to repay the loan and provide you with adequate income for your retirement.

 

ISA

With this repayment option you pay the interest on your home loan, plus additional contributions to an ISA. ISA's use stock market-based investments for tax-efficient growth and can enable you to pay off your mortgage early if your ISA performs well. However, if the stock market performs badly you could be left with a deficit to make up.

In any one tax year, you can invest £4,000 in a Mini Stocks and Shares ISA and £3,000 in a Mini Cash ISA or £7,000 in a Maxi Stocks and Shares ISA. Please note: you can't subscribe to both a Mini and a Maxi ISA in the same tax year.

Please note: it is important you review your investments regularly.

 

Variable Rate Mortgage

This simple home loan sets the interest rate according to the Lenders Standard Variable Rate (SVR).

There are normally no early repayment charges on variable rate loans, which is worth considering if you're thinking of paying off your mortgage early. However, budgeting for the future can be difficult, with unpredictable interest rate movements, and your repayments could rise rapidly if rates go up.

 

Discount Rate Mortgage

We can often help you reduce your expenses in the first few years of your mortgage by setting your interest rate below our Standard Variable Rate (SVR). Your repayments are still governed by rate changes but they are always relative to your discounted rate.

This type of mortgage is likely to be especially appealing if you're a first-time buyer, as it helps you free up money for other expenses in the early years. However, once the discounted period is over, the rate will revert back our SVR for the remaining term of the mortgage. This will cause monthly repayments to change. You may be able to take a new deal from the lender at this point though this could be subject to other rate conditions and you may have to pay an early repayment charge. A reservation fee may also apply.

 

Base Rate Tracker Mortgage

A base rate mortgage tracks an independently set interest rate, such as The Bank of England Base Rate. The benefit of a tracker mortgage is that you are guaranteed that any falls in interest rates will be passed on to you, usually from the beginning of the month after the rate change. However, any rises in rates are also guaranteed to be passed on to you.

 

Fixed Rate Mortgage

Your interest payments are fixed at a specified level for the first few years, allowing you to budget more effectively at the start of your mortgage. When the fixed-rate period is over, your payments change to our Standard Variable Rate (SVR) for the remaining term of the mortgage. You may be able to take a new deal from the lender at this point - though this could be subject to other rate conditions and you may have to pay an early repayment charge. A reservation fee may also apply.

 

Flexible Mortgage

A flexible mortgage gives you the flexibility to overpay, underpay and offset your mortgage repayments.

 

Lifetime Mortgage

An equity release product for the over 60s, which allows you to release money by borrowing against the value of your home. There are no monthly repayments, instead the interest is added to the loan and the whole amount is repaid when you die or move into long-term care, usually from the sale of the house. This means more interest will build up than with a conventional mortgage.

 

How to apply.

You can apply on-line click here.

You can apply on the phone by calling one of our branches below

Or you can visit one of our branches in person.

 

 

 

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOURS HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBTS SECURED ON IT.

 

Information on this site must not be construed as legal or financial advice on specific matters. All information is a public resource of general information, which is intended, be accurate, complete and up to date but is not guaranteed to be so. Your use of information on the Web Site or materials linked from the Web Site is at your own risk

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