The Simple Guide To Home Mortgage Options

By Author: Lucy Carter
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As the UK mortgage market is highly competitive, banks and building societies are constantly developing new offerings. Whether you're a first time buyer or looking to remortgage, it pays to keep your research current to find the best deal. It can be tricky however to get to understand the variety of deals available to you.

Depending on your individual circumstances and needs, there are different types of mortgage loans to choose from. The crux of the matter is deciding how you want to pay back the capital you borrow, as well as the interest on it. The following guide will help you get to grips with your potential choices.

Your options for paying the capital sum

There are 2 ways to pay back your capital fee - either in regular amounts over an agreed period of time, or all at once at the end of your mortgage term:

Interest only mortgage

These have become increasingly popular as they allow your monthly repayments to consist of purely the interest, and not the capital you have borrowed. This allows buyers to afford a more expensive home or simply to put less strain on their monthly outgoing debts. ...
... The danger of this option however is that at the end of the mortgage term you will have the large capital sum to pay all in one go, which could pose a serious problem if you haven't carefully planned for it.

Repayment mortgage
This type of loan is generally the easiest to get to grips with, since you simply pay monthly amounts for the duration of the mortgage, after which the debt will be cleared in full. While this minimises the risk of landing in trouble with a hefty lump sum at the end of your mortgage term, there is the danger that if you can't meet your monthly repayments, your lender can repossess your home.

Endowment mortgage
This entails taking out an endowment policy to save funds for the repayment of your capital loan at the end of the mortgage term, as well as to provide life insurance. Once highly popular, the risk is that if this investment performs badly on the financial marketplace, you could end up not having sufficient funds when the time comes to pay your capital. With scandals of lender mis-selling and compensation payments occurring in the past, these days few of these types of policies are sold.

Your options for paying the interest

Variable rate

These rates entail you paying the current interest rate on your mortgage. Rate changes are calculated once a year and the fee is altered accordingly. Most mortgages will entail you paying a variable rate at some point.

Fixed rate

This type of interest allows you to pay a fixed rate for the agreed period, usually 2-5 years. This makes it ideal for budgeting as you won't face the risk of rates rising unexpectedly. The downside however is that it often comes with penalties if you try to change lenders after the period ends, meaning you could end up paying high interest thereafter. Be sure to check how long you will be bound to the lender before you can switch to a potentially better deal without paying a hefty fee.

Capped rate

These mortgage deals are beneficial by being fixed, but if the interest rates fall, you will pay the lower rate.

Discounted rates

This offering entails you being given a discount on your lenders variable rate over an agreed term. The rate will change according to fluctuations in the variable rate.

Cash back

Lenders offer money back on these types of mortgages to entice you to take out a particular product. Beware however that these packages often include substantial penalty fees preventing you from switching to a better deal if it becomes available in the future.

Whether you're interested in first time buyer mortgages or a remortgage your existing loan, the above facts give you a clear understanding of the types of loan available to you in the UK. Above all, you're advised to carefully weigh the type of loan that will suit you best now and in the future, as well as to clearly calculate the monthly repayment fees by using a mortgage repayments calculator.
Sean Raston - economics student and expert in first time buyer mortgages.