The mortgage market
A mortgage is essentially just a very large loan. Unlike an ordinary bank loan or overdraft however, a mortgage is ‘secured’ on a property. This means that if you aren’t able to make the necessary repayments, your mortgage lender may have the right to sell your home in order to recover any money they are owed.
That’s the bad news. The good news is that the UK mortgage market is highly competitive. This means mortgage lenders often offer very attractive rates in order to lure in new customers. Often these rates only apply for the first few years of a mortgage and then you’ll revert to a more expensive rate, referred as the standard variable rate. Once this happens, it’s usually worth shopping around for another deal, which is called remortgaging.
In total, there are over 8,000 mortgages on offer here in the UK. Below we look at the main types of mortgages you can get.
Repayment mortgages
Most mortgages in the UK are repaid over 25 years, although you can get a mortgage which lasts for a longer or shorter period if you wish. With a repayment mortgage, you make a payment each month. Part of this payment is used to pay off a little of your mortgage debt, the remainder is used to pay for any interest due that month.
As the months and years go by, the money you owe on your mortgage gets gradually whittled away. Finally, after the 25 years is up, you should have paid off your mortgage in full. At this point your house is yours and yours alone.
Interest-only mortgages
Interest-only mortgages work slightly differently. You make one payment for any interest accrued in that month. Then you also make a second payment that goes into a type of investment fund. The idea here is that after 25 years have passed, your investment fund will have grown to such an extent it pays off your mortgage.
Compared with repayment mortgages, interest-only mortgages are more risky. There is a chance that your investment fund doesn’t grow quickly enough and you’ll have to pay the difference between its value and the amount of mortgage debt you owe. Additionally, if interest rates change, the monthly payments you make will rise and fall by a greater amount than if you had a repayment mortgage.
If you like you can get a mortgage that is part repayment and part interest only. You can also get a mortgage which has one of the following features.
Cashback mortgages
One type of mortgage that particularly appeals to first-time buyers is a cashback mortgage. As the name implies, you receive a cash lump sum from the lender. In return for this, you have to pay the lender’s standard variable rate for a set period of time. Although these deals sound attractive, you may find the cashback is not enough to compensate for the extra interest you end up paying compared to other deals offered to new customers.
The last few years have seen some more complex types of mortgages being made available. These are best suited to those people who are disciplined about their finances.
Flexible mortgages
A flexible mortgage allows you to make overpayments and underpayments on your mortgage, and even take a payment holiday. Making overpayments can save you significant amounts of money, as you’ll end up paying less interest and pay off your mortgage sooner.
Offset mortgages
An offset mortgage allows you to bundle debts and savings products together, with the aim that you pay less interest overall. Mostly they are used by people who wish to offset their savings accounts against their mortgage, and they then pay interest on the net amount. This can work to your benefit, as mortgage rates are typically higher than savings rates and you also don’t have to pay any tax on any mortgage interest you save, as you would do on a normal savings account.
Current account mortgages
Current account mortgages take the offset principle a step further. Here your current account and mortgage are merged into a single account – effectively turning your mortgage into one huge overdraft. The attraction here is that the moment your salary hits your current account, you’re paying less interest on your mortgage.
Flexible, offset and current account mortgages can save some people significant amounts of money but they often charge a slightly higher rate of interest than more straightforward mortgage deals.