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Interest only
With this kind of mortgage you pay just the interest on the loan every month so that after a typical loan period of 25 years, you still owe the capital (the original loan amount). Most borrowers put additional payments into a separate savings or investment scheme such as an ISA, so the aim is that when the term of the mortgage is up you have enough money available to pay off the loan. This can be a risky business as investments don't always do as well as we hope and some borrowers are left with a shortfall. However, it can work in your favour so if your investments do well, you may end up with a left over nest egg.
It's up to the individual borrowers to make sure they have a savings or investment plan in place to pay off the loan at the end of the agreed period.
Types of interest
After you have decided which repayment method suits you best you can then go and look at what deals are available. The main differences between the deals and different arrangements are related to how much interest you'll be paying, how interest is calculated, payment options and charges.
If you want the reassurance of knowing you'll be paying exactly the same mortgage payments every month, consider taking out a fixed rate mortgage that typically fixes your interest rate for 2 to 5 years. You're likely to pay a higher rate for the privilege than you would on a variable loan, but they offer the security of knowing that if interest rates go up, your repayment will remain the same. However, if variable rates go down, you can lose out.
This is a type of deal, normally arranged for 3 to 5 years, that guarantees the interest rate charged will not rise above a certain level. But it may fall in line with variable rates. A good option when you're unsure whether interest rates are likely to rise or fall, but as with a fixed rate you have to pay more for the security. Also be aware that some mortgages have a 'collar' that prevents rates going below a set level. If interest rates do drop below your collar level then you are not entitled to them as you have previously agreed that the collar rate is the lowest possible rate for your mortgage, so this reduces the benefit.
Discounted rate
This is a special low interest rate set at a percentage level below the lender's usual variable rate, eg, if your reduction is 2% and the variable rate is 5.5%, then you pay 3.5%. The rate stays at this level for a set period, normally 2 to 5 years, before returning to the lenders standard variable rate. If there are any increases in the variable rate, then the discounted rate will see a relative increase.
Base rate tracker
This type of mortgage tracks the Bank of England base rate but is set at a percentage amount below, rather like a discounted rate. So for example, if you were on a 0.5% discount and the base rate was 5.5%, you'd pay 5%. The difference between the base rate and the rate of interest you pay is set when you take the mortgage out. It can vary from 0.5-1%. Trackers are popular because they provide the stability that a fixed rate mortgage provides but potentially offer comparatively lower rates of interest. The base rate is reviewed by the Monetary Policy Committee of the Bank of England, once a month.
Cash back
A lump sum, say 5% of the loan, may be offered at the beginning of the mortgage as an incentive. Be wary though, you may be tied in with your lender for a specified time and have to pay a higher interest rate than other types of mortgage deals.
Flexible or offset mortgages
These types of mortgages give you more control over your repayment, but of course you will have to pay a higher rate of interest for the benefit. For example you can choose to pay lump sum amounts, pay more some months (overpayments) and even pay off your mortgage early reducing the amount of interest you pay long term. Conversely, you can pay less some months (underpayments) and even borrow back overpayments and take payment holidays.
You can 'draw down' money if you want to borrow to do work to your property and this extra amount will be secured on your house and paid in addition to the existing loan. Consider how long you want to spread the repayment, as it may work out cheaper say over 25 years, to take out an unsecured personal loan.
Buy-to-let mortgage
A buy-to-let mortgage is a mortgage for a property that is, or will be, let to tenants. This is semi-commercial lending, reflected in the higher set-up costs and marginally less attractive rates available. Income multiples are of secondary importance with this type of lending; mortgage lenders are more concerned with the relationship between rental income and mortgage payments.
Self-certification mortgage
Self-certification mortgages are designed for borrowers who can't prove their income and where it's difficult for lenders to assess an applicant's earnings in the conventional way. For example their income may come from a number of sources; or they may not have built up a sufficient amount of accounts in the short period they've been trading; or their salary maybe made up primarily of bonus or commission payments. The lender will ask for details of the borrower's income, without evidence of total earnings.
Self-cert mortgages have become extremely popular as a result of changes in the way many people work. They are limited though, with lenders offering a maximum of 85% of the property's value. You'll need to pay the balance which is likely to require a substantial deposit.
A Mortgage Agreement in Principle (MAP)
A seller will take you far more seriously when you're negotiating if you have a MAP. It means he/she knows you're serious about buying, you can afford his/her property, and that you have the mortgage pretty much in place that can speed up the moving process.
By applying in the branch or online, once agreed, the Mortgage in Principle is usually valid for 3 months. It shows the lender's willingness to loan you an agreed amount subject to certain conditions being met such as proof of earnings, credit history and a property valuation.