Repayment mortgage
Interest-only mortgage
Cash back mortgage
Self certification mortgage
Buy-to-let mortgage
Combination mortgage
Flexible mortgage
Overpaying
Underpaying
Payment holidays
Borrowing back
Calculating interest daily
Early repayment charge
Standard variable rate mortgage
Fixed rate mortgage
Capped rate mortgage
Discount rate mortgage
Tracker rate mortgage
Repayment mortgage (back to top)
With a repayment mortgage, you make monthly payments that cover both the interest on the loan and the repayment of the capital itself. This type of mortgage guarantees your loan will be paid off in full at the end of the term; as long as the required monthly payments are maintained throughout.
Interest-Only mortgage (back to top)
With an interest-only mortgage you pay off only the interest on the loan. You don’t pay off any of the outstanding debt until the end of the term.
In order to pay off the original loan amount, you will need to take out some form of savings plan into which you pay each month on top of the interest-only mortgage amount. It is your responsibility to ensure that you have sufficient funds to repay the full capital amount at the end of the agreed mortgage period.
Cash-back mortgage (back to top)
Cash-back mortgages are popular with first time buyers, as the lender will pay a lump sum of cash, generally at the start of the mortgage, which helps with the high costs of setting up home.
Similar to fixed or discounted rate mortgages, the lender will often offer the loan based on a minimum contract period. If the loan is repaid before this period expires, if you decide to re-mortgage for example, the lender may request that some or all of the cash back is also repaid.
Self certification mortgage (back to top)
Self-certification – or a ‘self-cert mortgage’ – is a way of detailing your income without having to provide proof of income.
This type of loan is typically designed for people whose “full” income is difficult to assess using the conventional methods. Self-certification products are especially suitable for potential borrowers whose income is dependent on bonuses, as well as workers on short-term or part-time contracts. A self-certification mortgage may also be used by self-employed borrowers who do not yet have sufficient accounts to prove their income.
Be aware that most self-cert mortgages are often on a slightly higher interest rate than similar products where standard income assessments can be used.
Buy-to-let mortgage (back to top)
A wide range of buy-to-let products, ranging from special offer deals to fixed and variable rate loans, are designed especially for the property investment market.
Some lenders will only consider your rental income when offering a mortgage, while others will place more emphasis on your normal earnings, especially if you only have one or two rental properties.
The anticipated rental income must exceed the mortgage repayments by a certain percentage and the lender will also want to ensure that the property is a good long-term investment.
Generally, buy-to-let mortgages are available for between five and 45 years.
When buying a buy-to-let property, don’t forget to consider additional costs such as letting agent’s commission, insurance premiums for building & contents cover, as well as rental & legal expenses cover.
Moreover, remember that the property must be kept in a suitable condition for letting, including making sure that all gas and electric appliances are properly tested.
Managing a buy-to-let requires continual monitoring as there is no guarantee that it will be possible to continuously let the property, nor that the actual rental income achieved will be sufficient to meet the cost of the mortgage.
Combination mortgage (back to top)
With a combined mortgage, a proportion of the loan is treated as an interest-only mortgage and the remainder as a repayment mortgage. Therefore, you will use both repayment and interest-only methods to repay the loan.
This type of loan is favoured by those with an investment policy; such as an endowment or ISA in place. The proceeds of this policy can then be used to repay the capital on the interest-only element of the mortgage at the end of the term.
Flexible mortgage (back to top)
A flexible mortgage enables you to vary your monthly repayments. When you are able you can make overpayments to pay off your mortgage and reduce its overall cost. Alternatively, when you need to you can make underpayments or even put payments on hold (take payment holidays). If necessary, you may be able to borrow back your overpayments for large or unforeseen expenditures. In exchange for this flexibility, these mortgage products usually have a higher interest rate.
Your mortgage talk advisor will help you choose the flexible mortgage deal that suits you best.
Overpaying (back to top)
Most borrowers who choose a flexible mortgage will tend to make overpayments. This means they make additional mortgage payments and pay their mortgage debt off quicker possibly saving thousands of pounds in interest payments. If you can afford to make some overpayments why not do so? Even overpaying by just a small amount will help reduce your mortgage term.
Underpaying (back to top)
With a flexible mortgage package, you should be able to pay less than the agreed monthly amount. However, you must have already made some overpayments and your total sum of underpayments must not be greater than the total sum of your overpayments. Be aware that underpaying will add time to the length of your mortgage term, but it could come in handy in months where you need to keep a check on your spending!
Payment holidays (back to top)
Some flexible mortgage deals allow you to take a complete break from making mortgage payments for up to a year. This could be useful in a number of ways – for example if you are thinking of starting a family, or embarking on a new business venture.
You must have built up sufficient overpayments to cover the period you take off. And some mortgage lenders may only let you take a couple of months’ payment holiday each year. Speak to your mortgage talk advisor if you think that this option might be useful.
Borrowing back (back to top)
Borrowing back on overpayments you have made is an ideal way of obtaining extra cash for a specific purpose.
This is one area where flexible mortgages are particularly attractive as, rather than your spare cash earning a low rate of interest in a savings account, the amount you over pay is taken off your mortgage. As such, you are earning the mortgage rate on your savings.
Moreover, with borrow back, it’s like you have an instant access savings account at a higher rate. So if you want to buy something costly, or you run into unforeseen expense, your money is at hand straight away.
Calculating interest daily (back to top)
For flexible mortgages, interest is normally calculated daily and any payments and overpayments are credited to your mortgage account as soon as they are paid.
This saves you money immediately with interest charges that would otherwise add up over a number of years. Mortgage interest had previously been calculated and applied annually in arrears, meaning that you would be paying interest on the same amount of debt all year, even though the outstanding amount might have been decreased during that time.
Early repayment charge (back to top)
An early repayment charge is a fee you may have to pay to your lender if you choose to repay all or part of your mortgage within the lender's specified period.
Early repayment charges only apply to specific discounted, fixed, capped or other incentive schemes where the lender is providing, for example, a special reduced interest rate for an initial period. Usually the term during which this payment can be claimed will match this incentive period, however, for some products this can extend beyond the incentive phase.
Typically, a repayment charge will be a set figure or a percentage of the outstanding mortgage amount e.g. 2%. Additionally, the amount you are required to pay may vary slightly depending on how long you have had the mortgage.
With a conventional standard variable rate mortgage, you can change between products without incurring an early repayment charge.
Standard variable rate mortgage (back to top)
A standard variable rate (SVR) mortgage is based on the lender’s basic mortgage rate. This is usually the rate to which you will revert once a discount or other incentive period ends.
The interest rate for this type of mortgage rises and falls in response to changes in the Bank of England (BOE) base rate. Lenders are free to decide for themselves the amount that they will alter their own interest rates by in relation to these movements in base rate.
Fixed rate mortgage (back to top)
A fixed rate mortgage enables you to know exactly what your monthly payments will be for a predetermined period of time, regardless of any movements in the BOE base rate.
If the interest rate rises above the fixed rate that you are paying, you will actually save money. However, the reverse of this is also true. If the interest rate goes down while the fixed rate deal is in place, you may end up paying more than a comparable standard variable rate (SVR) product!
Once the fixed time period expires, your mortgage repayments usually switch to the mortgage lender's standard variable rate.
Generally with a fixed rate product there will be an associated "contract" period during which an early repayment charge may be applied if the mortgage is repaid. Be aware, the "contract" period may well extend beyond the period during which the rate is fixed.
Capped rate mortgage (back to top)
As it suggests, a capped rate mortgage places an upper limit on the interest rate that the lender can charge. As a borrower, you have the security of a ‘ceiling’ to the amount that the lender can increase your mortgage interest rate to.
The capped interest rate period is for a specified duration, usually between one and five years. At the end of this period, the mortgage will usually revert to the lender's Standard Variable Rate (SVR).
Be aware that some capped rate mortgages also have a ‘collar’ or lower limit below which interest on your loan cannot fall.
Some lenders may attach an early repayment charge for full repayment of the mortgage during, and often for a limited period after your capped period has ended.
Discount rate mortgage (back to top)
This type of mortgage rises and falls in response to movements in the lender’s standard variable rate (SVR). However, the amount payable will be a fixed percentage less than this SVR during the discount period.
First time buyers tend to favour discount rate mortgages as their initial income may be stretched but they expect to have salary increases in the future. They can also be useful the for new home owners as they can help to free up some money during the early stages to pay for additional expenses such as furniture and decoration.
Typical discount periods can last from six months up to five years – but discounts tend to be higher on shorter discount periods. Some lenders may attach an early repayment charge for full repayment of the mortgage during and for limited periods after the end of the discount period.
Tracker rate mortgage (back to top)
A tracker rate mortgage rises and falls in line with the base rate set by the Bank of England (BOE).
The tracker mortgage rate is usually set at a standard percentage slightly higher than the BOE base rate for a set period of time. Generally the rate is lower than the lender’s SVR product.
Because this type of mortgage tracks the Bank of England base rate, if the bank’s base rate falls, the interest payments on your mortgage loan will fall accordingly. Some products will have a 'collar' i.e. a lower limit at which the product rate will stop tracking any further reductions in the BOE base rate. Don’t forget however that the bank’s base rate can rise as well as fall; which can make budget planning difficult.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Mortgage Talk's typical fee for arranging your mortgage is £199, however depending on your circumstances, a fee of up to 1.5% of the mortgage amount may be charged.