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Guide to mortgage types
A Quick Guide to Mortgage Types

Choosing a mortgage can be a daunting experience especially given there are so many mortgage types. Here's a brief guide to the various types of mortgages available in the UK today.

100% Mortgage

If you take up a 100% mortgage, you are borrowing the full amount of the property's value. You will not require any deposit. This is usually a last resort solution for those who cannot afford to climb onto the property ladder as they have not got enough spare funds.  Beware that this mortgage type usually carries a higher interest rate and you may get tied into a long-term deal.

Base Rate Tracker Mortgage

A base-rate tracker type of mortgage has an interest rate that tracks the Bank of England's base lending rate. Each time the Bank of England makes changes to its base rate, your interest rate will change by exactly the same amount. These types of mortgages will last for a few years, after which they will revert to the lender's SVR.

Bad Credit Mortgages

This type of mortgage is made for people who cannot secure a standard mortgage as they have a poor credit rating as a result of past credit problems. These bad credit mortgage types usually come with an extremely high interest rate and severe restrictions or penalties.  If you have extensive credit card debts, have been declared bankrupt, had a County Court Judgement (CCJ) against you or have had a mortgage application declined in the past, you may have to apply for bad credit mortgages.

Buy To Let Mortgages

This type of mortgage is suitable for people who are buying a property for investment purposes in the form of rentals or lets to tenants. It is a good way of saving up for your retirement instead of the traditional pensions.

Capped Rate Mortgages

Capped rate mortgages as one of many mortgage types can offer the best of both variable and fixed rate deals.  You agree to have a limit on the maximum amount of interest you will pay over a period of time. You benefit from falling interest rates, but are protected from rate rises.

Current Account Mortgages

These types of mortgages combine your current account with your mortgage account. Just like a bank account, you get a chequebook, direct debit facility, credit and cash card, and regular statements. Your salary is paid straight into this combined account which means that you may pay less interest on your mortgage because your earnings are being used to offset the loan.

Equity Release Mortgages

If you own a home, you might want to release some equity from your home to give you a cash lump sum. If you have paid off a large portion of your mortgage and/or property prices have risen, you can choose to free up some of the equity or value that is held within your house without having to sell your home. Make sure that this mortgage type—your equity release plan—is protected from negative equity.

Fixed Interest Mortgage

This type of mortgage is where you and the lender agree to fix the interest rate owed on your loan for a set period of time, usually between 2 and 5 years and possibly longer.  After the agreed period, the interest rate owed on your mortgage usually reverts to the lender's SVR. The disadvantage lies in the fact that if interest rates fall, you may be paying more than you planned.

Flexible Mortgages

One of the most popular mortgage types, many borrowers are attracted to flexible mortgages as you are permitted to overpay or underpay on a monthly basis depending on your needs and financial position, without incurring any penalties. You can even take a payment holiday if you so wish! This mortgage type tends to come with a higher rate of interest. Some lenders may impose a limit on the number of times you can alter the level of your repayments.

Interest-Only Mortgages

An interest-only mortgage means that you are only required to repay the monthly interest on the debt, and not the capital debt. You will enjoy low monthly repayments, but at the end of the mortgage term, you have to find the means to pay off the larger capital portion that remains unpaid. This can be done by an endowment plan, a pension plan, or an ISA.

Repayment Mortgages

Perhaps these most popular of all mortgage types, this type of mortgage is the old-fashioned and traditional way of paying for your property. It is the best mortgage type to guarantee that you will eventually and completely own your house, as long as you can make regular monthly repayments throughout the lifetime of the mortgage term, usually 25 years. In the early years, you usually pay off mostly interest. Surely but gradually, you begin to pay off more of the capital until the debt is fully paid up!

Self-Certification Mortgages

These types of mortgages are suitable for many people who find it difficult to prove their income, such as the self-employed.  These mortgages are similar to standard mortgages except you are not required to provide proof of your income.You will, however, be credit checked and provide a signed declaration of your income.

Subprime Mortgages

Of all mortgage types, subprime mortgages can come with exorbitantly high rates compared to standard mortgage deals as the lenders believe that there is a higher risk of default involved. People are forced to apply for these types of mortgages if they have a poor credit history.

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