Types of mortgage products

The world of mortgages can be something of a minefield for those that know little or nothing about these loans, yet at the same time it is vital to learn more about these loan products before you actually commit to a mortgage. A mortgage is a very long term and daunting financial commitment, and it is therefore imperative that you choose the right product for your needs and pocket, otherwise you could end up paying dearly in the long run.

With so many mortgage products available it is often advisable to seek the assistance of an independent financial adviser, as these professionals are experts in the area of mortgages, and many will offer sound, unbiased advice to ensure that you get the mortgage product that is best suited to your needs. It is advisable to select an adviser that takes payment from you as the customer rather than one that takes commission from the lenders, as this will ensure that the adviser is working in your best interests and not in the best interests of his or her own pocket based on the level of commission that the lenders pay out.

However, even if you plan to seek advice from a financial adviser it is best to read up on the different mortgage products available so that you have some idea of the type of mortgage that interests you.

Categories: All mortgages come under two main categories, and this is the repayment mortgage (also known as a capital and interest mortgage) and the interest only mortgage. With a repayment mortgage you make monthly repayments, which are then split between the interest on the loan and the actual loan amount. By the end of the mortgage term your balance should be zero. With an interest only mortgage your monthly repayments are used to pay off the interest on the loan but no money is allocated to the actual loan amount. You will therefore need to pay money into some sort of investment product to run alongside the mortgage so that you can build up enough capital to pay off the actual loan amount at the end of the mortgage term.

Different mortgages

Variable rate mortgage: A variable rate mortgage is where the interest charged on the mortgage loan can go up or down in line with the base rate set by the Bank of England. This is one of the most commonly selected mortgage types. With a variable rate mortgage your repayments can go up or down as interest rates change. The benefit of these mortgage is that if the base rate comes down your interest rate and repayment will also come down. However, on the flipside of the coin, when the base rate goes up your interest rate and repayment will also rise.

Fixed rate mortgage: As the name suggests, a fixed rate mortgage is where the interest rate on the mortgage loan is fixed, usually for a set period of time such as two, three, or five years. More recently, longer term fixed rate mortgages have become available with some lenders offering a fixed rate over the full term of the loan. If you opt for a fixed rate the interest rate will usually be fixed at a slightly higher rate than the interest rates on variable rate mortgages, and you will then be locked in on that interest rate over the term specified. The benefit of a fixed rate mortgage is that it allows for easier budgeting, as you will know exactly how much your repayment will be each month. Another main benefit is that if the base interest rate rises your interest rate and repayment will not be affected. However, on the downside if interest rates fall you will still have to pay on the higher rate of interest that you are tied into, and therefore you will have to continue making higher repayments.

Capped rate mortgage: A capped rate mortgage is a type of variable rate mortgage, but the benefit with this type of deal is that there is a ceiling limit above which your interest rate cannot rise. So, although your interest rate will rise in line with the base rate, once it reached a certain level, as specified when you take out the mortgage, it will not rise any further. If interest rates fall, however, your interest rate and repayment will still come down. After a specified period the mortgage will revert back to the lender’s standard variable rate mortgage. You may have to pay arrangement fees with this type of mortgage.

Discounted rate mortgage: With a discounted rate mortgage you can a discount on the standard variable rate charged by the lender for a period of time. So, you may be able to get a deal that offers 1% off the standard variable rate for the first three years of your mortgage. Your interest rate will still be variable and can therefore go up or down, but will be at a discounted rate for the period specified. Again, you may find that there are arrangement fees to pay with this type of mortgage product.

There are a number of other mortgage products available to consumers, and this includes base rate tracker mortgages, flexible mortgages, offset mortgages, and more. You can also enjoy a cash back feature with some mortgages, where you can get cash back upon completion of the mortgage, altho9ugh you should make sure that the cash back is not counteracted by expensive set up fees and charges.