Types of mortgages

• Types of Mortages
• Interest or repayment
• Playing the numbers game - How much mortage can you afford?

When it comes to selecting the best way to pay back your mortgage, you need to decide on something that suits you. Don’t be blinded by all the different types of mortgage available such as capped, collared, variable, fixed, tracker, lifetime, offset mortgages.

We suggest you initially start looking at these types of mortgage:

Fixed:
If you would prefer to have a set amount of money going out of your account every month to cover the costs, then look for a fixed rate mortgage. Your monthly amount may be a little higher than with other deals, but as it is set at an agreed level, it will give you peace of mind when putting your budget together.

Variable:
If you go for a variable rate mortgage you'll pay the lender's standard variable rate of interest (SVR). This is linked to market conditions, which means that if the Bank of England’s base rate falls, so will your monthly premiums - which will be good news for you. However, beware if the rate increases as you will be expected to pay the increased amount.

Discount rate mortgages:
With discount rate mortgages the interest rate you pay is set below the SVR for a specific period. For example, if the SVR is five per cent, your rate could be four per cent, giving you a one per cent discount.

As with the variable rate, this would mean that you could benefit from lower payments but they may go up as well as down. One major consideration of a discounted rate mortgage that must not be forgotten, is that at the end of the discounted term your mortgage repayments WILL increase back to the standard rate.

Capped and collared:
Capped rate mortgages are basically a mixture of the fixed rate and discount rate mortgage. A maximum interest rate is agreed for a set period of time but if the SVR drops below that rate you'll pay that lower amount. In other words the mortgage interest rate may fluctuate up and down below the specified rate, but may not go above it. Some capped mortgages will not only have a 'ceiling' but also a 'floor' between which the rate payable may move. These loans are known as cap and collar mortgages.

Interest or Repayment

As well as choosing the type of mortgage you want to get, you will need to select a method of payback. You need to decide whether you want to go what is known as interest only or repayment? But what does this really mean?

Interest only - you only pay the interest on the mortgage and will need to separately pay back the outstanding loan at the end of the term. Interest only will give you a much lower monthly mortgage amount and that attracts many young people but while it might sound attractive you will be required to pay off the outstanding amount at the end of the term. Interest only is putting off the inevitable – what you don’t pay now you will have to pay in the future.

Repayment - you pay the “full” amount each month to cover the whole loan. This means at the end of your term you will own your house outright with no final payments to be made. Your monthly payment will be higher but you are paying towards something that will eventually be yours with no surprises. This approach will give you more peace of mind as long as you can actually afford the payments each month.

Playing the numbers game
- How much mortgage can you afford?

When you come to calculate the level of mortgage you can afford, it is usual to multiply your salary by 2 or 3 to give you a sensible loan amount. We say sensible because this amount must then be paid back by you over the course of the loan through regular payments.

In recent times there has been an increase in the figure used to multiply your salary in order to obtain higher loans. Multiples of upto 6 times salary are not uncommon. Whilst these larger sums are often needed to get a foot on the property ladder given the sharp increase in the average house price in the UK, you do actually need to be able to afford your mortgage payments. It is no good being able to afford the repayment one month but not the next.

Remember if you take out a loan that you subsequently can’t afford the repayments on, you will end up losing your house. Our advice is to push yourself to borrow the highest amount you can afford but making absolutely sure that the numbers stack up.

Getting a mortgage