What are the different types of mortgages?
Variable Rate - this is the Bank or Building Societies main rate and will go up and down as rates change over the years, meaning that your payments can fluctuate.
Discount Rate - is where the lender will give you a discount on the variable rate to secure your business for a set period of time. Again your payments will fluctuate with any change on the percentage rate.
Fixed Rate - is where the lender will offer you a fixed rate to secure your business for a set period of time. A fixed rate means that whatever happens to interest rates during your fixed rate period, your payments are protected and will remain the same. This of course can be an advantage or disadvantage as they would also remain the same if the variable rate fell.
Capped Rate - is where the mortgage rate is flexible, but in the event of interest rates going up you have a "cap" or maximum amount your interest rate will go up to.
Collared Rate - the opposite of "capped", where there is a rate below which the lender will not allow your interest rate to drop.
What is an interest only mortgage?
As the name suggests it is where you only pay the interest on the mortgage, without reducing the
capital. An endowment mortgage used to be the main method of building up funds while you only
paid the interest each month. The aim of the endowment policy was to generate a lump sum equal
to the amount borrowed. Due to lower than expected returns on policies in the early 2000's it is
forecast that some endowments might struggle to meet the mortgage amount. Not all lenders will
offer you an interest only mortgage without being aware of how you have planned to repay the capital.
What is an offset mortgage?
An offset mortgage is where you tie in a bank account linked to the mortgage, but you only pay interest
each month on the difference between the amount of your mortgage, less the amount in your linked account.
For instance if you have a mortgage of £100,000 and have £30,000 on deposit in a linked account, you would
only pay interest on the difference of £70,000. An offset mortgage is ideal for say a self employed person
who might save up their twice yearly tax payments in an account. By using an offset mortgage it could
reduce the amount of interest payable each month, thus saving money without any further liability to tax
on the savings.
What is a lifetime mortgage?
Similar to an interest only mortgage, where only interest is paid, with the loan amount being paid
from the equity on the sale of the property on death.
Some lenders wish me to take out an "all dancing" account including a mortgage, how does that work?
Usually the same as an offset mortgage, see above, but there is no separate (offset) account, but rather
it is all in one mortgage account, from which you can access your capital.
What is Equity Release?
Where equity is released from your property, by taking out a mortgage. It is most commonly used either
to fund other property, or for elderly people who might be "asset rich but cash poor". An equity release
can be taken to release a lump sum, which can be used to give income, by mortgaging, with either only the
interest being paid back, (interest only), or no payments at all as the lender is allowing the interest to
accrue against the future value of the property.
Notes:
A mortgage which is "collared and capped", means the rate has a maximum and a minimum rate but can
fluctuate within that band.
At the end of any special rate, i.e. either a discount or fixed rate mortgage you would automatically revert to that lenders variable rate.
You would also usually have to pay a penalty if you repaid all or part of the mortgage during a fixed or discounted rate period. In addition it is worth taking advice on any penalties that might be still in place after the discount or fixed rate period ends. This is called an overhang penalty, and usually the cheaper the fixed or discounted rate is, the more possibility you have of having an overhang penalty. Normally, any mortgage with this type of penalty is best avoided.