Types of mortgages
A mortgage is a loan secured against real estate (land or property) for the purpose of the borrower owning that real estate upon the repayment of that mortgage.
The mortgage agreement sets out the terms of agreement between the borrower and the lender for the interest charges and the repayment of that loan.
You can repay your mortgage in the following ways:
Each month you pay off a portion of the amount borrowed (the capital) as well as some of the interest on the loan. As you are paying the loan back over your mortgage term, as long as you keep up your repayments, you should be mortgage free at the end of it.
Interest Only mortgages
Your monthly payments only cover the interest part of your loan. At the end of the mortgage term, you’ll still need to repay the amount you originally borrowed so you will need to consider your repayment strategy and confirm with your lender that this is acceptable to them. You will also need to check with your lender whether or not they offer Interest Only mortgages as many lenders have recently restricted their Interest Only criteria.
Part and Part mortgages
Part of your mortgage will be on a repayment basis and part will be on an Interest Only basis. As with Interest Only, you will need to check with your lender if this repayment method is acceptable and the full terms and conditions.
The most common types of mortgages are:
Fixed rate mortgage:
You’ll pay a fixed rate of interest for a set period. This means that during your set period you’ll know each month what your monthly repayments will be so you can budget accordingly however because your interest rate is fixed your repayments will not change if interest rates reduce.
Your interest rate will follow the Bank of England Base Rate, or another base rate. As those rates go up and down, your mortgage rate and your repayment amounts will also go up and down.
Variable Rate mortgage:
Your payments go up or down in line with the lender’s standard interest rate instead of Bank of England Base Rate. The rate can go up or down at any time, by any amount.