Mortgage Types

Discount, Capped, Cashback | First-Time Buyers | Fixed Rate, Interest-Only, Offset | Help To Buy | Repayment, Tracker, Variable

Discount Rate

A discount rate is a type of variable rate mortgage where the interest rate is set at a discount below a rate of interest, typically the lender’s Standard Variable Rate (SVR) for an initial period of time, typically two or three years.

The obvious benefit here is that the rate is lower, so your repayments will be cheaper. However, if interest rates rise, you can expect your repayments to increase too. You also need to be aware that lenders have differing SVRs, so you may need help in working out which discount deal is most suitable and the most cost-effective option for you.

Capped Rate

A type of variable rate mortgage, but these have an interest rate ceiling, or cap, beyond which your payments can’t rise.

The interest rate is often higher than that available on other variable and fixed rate mortgages and the cap can be set quite high. However, it provides the certainty that your payments will not rise above a certain level.

A capped rate is normally only available for an introductory period, which can typically be from two to five years.

This type of mortgage may also have a minimum rate of interest that the lender will charge for a specified period. This is referred to as a ‘collar’.

Cashback Mortgage

This mortgage comes with a cash sum that’s paid to you once your purchase or remortgage has been completed and your mortgage is in place.

The amount you receive is normally expressed as a percentage of the amount you have borrowed, although it can be a fixed amount. It’s important to be aware that this type of mortgage may not be offered at a competitive rate and might mean that you’ll be paying higher monthly payments as a result.

First Time Buyers

Buying your first home can be both an exciting and nerve-racking experience. The exciting bit is having your own front door and space to call your own; the nerve-racking part can be finding somewhere you can afford, saving enough for the deposit and getting a mortgage product that’s right for your financial circumstances.

Before you start looking for a property to buy, it makes sense to take advice. We can help you work out how much you’re likely to be able to borrow and give you useful hints and tips that will help you prepare for the mortgage application process. We know what’s happening in the market, so we can help you make your mortgage application to the most appropriate lender when the time is right.

Fixed Rate

With a fixed-rate mortgage, the interest rate you pay remains the same for a set period, so your mortgage repayments will remain the same, even if interest rates rise.

This type of mortgage is often available as a two, three, five or ten-year deal and provides peace of mind that your repayments will be the same for the duration of the fixed term.

If you choose a fixed-rate mortgage, you will need to think about arranging your next mortgage deal a few months before the current one ends, as when it does, you’ll be moved onto your lender’s Standard Variable Rate (SVR), which generally means you’ll be charged a higher rate.

Interest-Only

With an interest-only mortgage, each month you only pay the interest outstanding on the mortgage, meaning that the capital sum remains the same throughout the period of the mortgage. You don’t pay off any of the capital until the end of the mortgage term.

This means that you will need to make other arrangements for paying back the capital sum. These mortgages are not as widely available as they once were. Lenders will now only lend money in this way if the borrower can clearly demonstrate how they propose to repay the capital sum at the end of the mortgage term.

Offset Mortgages

An offset mortgage allows you to use your savings to reduce the amount of interest you pay on your outstanding mortgage balance. It links your savings, and in some cases your current account, to your mortgage.

This means that instead of earning interest on your savings, you pay less interest on your mortgage. So, for example, if you have a mortgage of £125,000 and you have £25,000 in your linked accounts, then your monthly mortgage interest would be calculated on £100,000 instead of the balance of £125,000.

Whilst an offset mortgage can save you money and shorten your mortgage term, they can be more expensive than comparable deals, and there may be less choice available.

Government-backed mortgage schemes

Help to Buy: Equity Loan scheme

This scheme is designed to help first-time buyers who want to buy a ‘new build’ property from a registered Help to Buy builder.

You can borrow a minimum of 5% and up to a maximum of 20% (40% in London) of the full purchase price of a new-build home
The equity loan, your deposit and your repayment mortgage cover the total cost of buying your newly built home
The percentage you borrow is based on the market value of your home when you buy it
You do not pay interest on the equity loan for the first 5 years and then start to pay interest in year 6, on the equity loan amount you borrowed
The equity loan payments are interest only
You can repay all or part of your equity loan at any time. A part payment must be at least 10% of what your home is worth at the time of repayment.

In Scotland, Help to Buy(Scotland) and First Home Fund for first-time buyers, are no longer available.

In Wales, the Help to Buy scheme supports the purchase of homes up to £250,000

Help to Buy: Shared Ownership

This scheme helps those on lower incomes and first-time buyers who might not otherwise be able to get onto the housing ladder to purchase a property and is a cross between buying and renting. Many of the major lenders will grant mortgages for a shared ownership home.

In England, under the scheme, you can buy between 25% and 75% of a property, with an option to purchase a bigger share of the property at a later date. You’ll need to take out a mortgage to pay for your share of the property’s purchase price and then pay rent on the remainder. So, for example, if a property within the scheme is worth £200,000 and you bought 50% of it, you will pay rent on £100,000. If the rent charged by the housing association share is charged at 3%, then you would pay £3,000 a year in rent, as well as repaying your mortgage.

Most of the properties available under the scheme are new build, but some are properties being resold by housing associations.

The rules of the scheme operate differently in Scotland, Wales and Northern Ireland.

Repayment

This is the most popular and widely-available option, where you make monthly repayments for an agreed period of time until you’ve paid back both the mortgage capital and the interest.

With a repayment mortgage, or capital repayment mortgage, to give it its full name, you pay back part of the mortgage capital and interest each month. At the outset, most of your monthly payments will comprise of interest; over time, more of your monthly payment will be repaying the capital.

With a repayment mortgage, you are guaranteed to repay the full mortgage by the end of your mortgage term, provided you make your repayments in full each month.

Tracker Mortgages

A tracker mortgage is a type of variable rate mortgage which tracks a nominated interest rate, usually the Bank of England base rate. The actual mortgage rate you pay will be at a set interest rate above or below the rate tracked. When the rate tracked goes up, your mortgage rate will go up by the same amount. And it will come down when the rate tracked comes down.

Variable Rate

The interest rate used here is the lender’s default rate, their Standard Variable Rate (SVR). As the name suggests, the rate applied can change at any time, meaning that your monthly repayments could do so too.

With this type of product there isn’t usually an early repayment charge with your lender, so you can move to another type of mortgage at any time and can potentially overpay your mortgage to pay it off faster and shorten the term. However, variable rate mortgages can potentially change if the Bank of England base rate rises or falls, making it harder to budget for your repayments. There can often be better and more cost-effective deals available in the marketplace.

As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.