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Types of Mortgage

 

A mortgage is the biggest financial commitment most people will ever have. Getting it wrong can potentially cost you thousands of pounds extra over the term of the mortgage.

 

Finding the right mortgage these days can be very difficult for a number of reasons.

 

Firstly, with so many mortgages to choose from it can be very difficult to determine which is going to best suit your needs. Secondly, looking for the right mortgage can be very time consuming and frustrating, and the last thing you want to do is settle for second best simply because you do not have the time or energy to browse and compare a range of mortgages from a number of lenders.

 

The goods news is that Plus 4 Financial Services can help you. We are a 'Whole of Market' broker who specialise in finding their clients the most suitable mortgage deal. We have links to all mortgage lenders and access to every mortgage product in the market place.

 

The established links that Plus 4 Financial Services has with all lenders means that we know which lenders are most likely to be able to help you based on your details and circumstances, saving you a great deal of time, effort, and inconvenience on wasted applications and rejections by applying for mortgages that are unsuitable for your needs.

 

Plus 4 Financial Services will do all the legwork for you, from in the first instance finding you the most suitable mortgage to completing the application and liaising with the lender and solicitor throughout the process, allowing you to get on with your life.

 

You can choose to pay your mortgage back in the following ways:

 

Repayment
Interest-only
Or a combination of the two.

 

We will help you to decide which is best option for you.

 

Repayment mortgages

 

Every month, your payments to the lender go towards reducing the amount you owe as well as paying the interest they charge. So each month you're paying off a small part of your mortgage.

 

The pros: It's a simple, clear approach - you can see your loan getting smaller.

 

The cons: In the early years your payments will be mainly interest, so if you want to repay the mortgage or move house in the early years, you'll find that the amount you owe won't have gone down by very much.

 

Interest-only mortgages

 

As the name suggests, your monthly payment only pays the interest charges on your loan - you're not actually reducing the loan itself. This is why it's very important you arrange some other way to repay the loan at the end of the term; for example, through an investment or savings plan.

 

If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up.

 

The pros: Because you're only paying off the interest, and not the loan itself, your monthly payments will be lower.

 

The cons: That debt is not going to go away. Throughout the life of the mortgage, you'll need to check your investment or savings plan is on track to repay your loan at the end of the term. If you can't repay it at the end of the term you could lose your home.

 

So, choosing a repayment or interest-only mortgage is one decision. The other will be to choose the interest-rate deal.

 

Type of interest rate deals	How does it work?	Early repayment charges	What does it mean for you?
Standard variable rate	Your payments move up or down at the lender's discretion. The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down.	Not usually, but check and see.	Usually you can leave your lender without any penalties or problems. You're in control. You can usually pay back extra amounts (and cut your interest costs) without a penalty. It moves with interest rates. So if the lender decides to increase the rate your monthly payments will increase. It may be expensive compared to other deals. The lender may not reduce, or may delay reducing, their variable rate even if the Bank of England rate goes down.
Tracker rate	A variable rate loan with an interest rate that's equal to or a set amount above or below the Bank of England or some other base rate. It tracks (moves up or down with) that rate.	Sometimes during any special deal period and maybe even after the period too.	It can pay to go for a tracker if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down. It's not a good choice if your budget won't stretch to higher monthly payments.
Discounted interest rate	Your monthly payments can go up or down, but you get a discount on the lender's standard variable rate for a set period of time. At the end of the deal, you usually change over to the full standard variable rate.	During the special deal: yes, almost always. They can apply even after the end of the special deal period as well.	It gives you a gentler start to your mortgage, at a time when money may well be tight. But you must be confident you can afford the payments when the discount ends. The discount period is limited, so don't get used to those early low repayments. You may not be able to make overpayments and pay off the loan early without penalties The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down.
Fixed interest rate	Your payments are set at a certain level for an agreed period. At the end of that period, they'll usually switch you to the standard variable rate.	During the special deal period: yes, almost always. They can apply even after the special deal period, too.	Your payments will stay the same in that period, even if interest rates go up. This gives you the security of knowing that you can afford your payments and will make it easier for you to budget. If rates go down, you won't benefit. Your payments will stay at the higher rate. You may not be able to make overpayments and pay off the loan early without penalties.
Capped rate	Your payments are variable and often linked to a base rate, but fixed not to go above a set level (the 'ceiling' or 'cap') during the period of the deal. At the end of the period, you are usually charged the lender's standard variable rate.	During the special deal: yes, almost always. They can apply even after the end of the special deal period as well.	You know the maximum you will pay for a set period of time.   Useful if you want the security of knowing that your payments can't rise above the set level, but still benefit if rates fall.
Collared rate	May be used in conjunction with a capped rate or a tracker (or both). Your payments are variable but will not fall below a set level (the 'collar').	Not usually, unless it is used in conjunction with a capped rate or a special-deal tracker rate (or both). But check and see.	It may be part of another interest-rate deal which otherwise appears attractive. But note that if the rate payable is only just above the 'collar' and you think rates will fall, you may not get the full benefit of a reduced payment.