Types of Mortgages: There are many types of different mortgages. Read our comprehensive list of the different types of mortgages.
Capped rate mortgage
A capped rate mortgage is a cross between a fixed rate and a variable rate mortgage, where the interest rate never rises above a certain rate within what is known as the capped rate period. Where the usual variable mortgage rate is less than the capped rate, the borrower is charged the variable rate. A capped rate mortgage can be attractive because the borrower may benefit from lower interest rates but will not have to pay more than the capped rate.
Cash back mortgage
In a cash back mortgage, once the mortgage is completed, the lender will pay you a percentage of the amount borrowed back as a lump sum. The bigger the cash back sum paid out, the more strings are likely to be attached to the mortgage, such as high redemption penalties over a long period if you redeem the mortgage early, or less competitive interest rates than for other mortgages.
Current account mortgage
Current account mortgages, or offset mortgages, combine the money you earn and save with your mortgage. The money in this type of mortgage should be viewed as a whole, as the interest that is charged on your current account mortgage is usually calculated daily, making the date that wages/bills are credited/debited important.
Deferred interest mortgage
This is type of mortgage where not all of the interest due is paid in the early years, but the unpaid interest is added to the outstanding mortgage. This means that a borrower will end up owing more than the initial mortgage amount and the interest payments will be higher over the rest of the mortgage term.
Discounted mortgages
Home lenders provide a variety of offers that promise a discount off the prevailing variable interest rate – that is, the interest rate on offer is set at a margin below the standard variable rate. The discount will last for an agreed period, but the borrower will normally have to agree to stay with the lender for a length of time or face withdrawal penalties.
Fixed rate mortgage
A fixed rate mortgage has a monthly repayment amount that is fixed for a specified period irrespective of changes to the Bank of England’s base rate or the lenders standard variable rate. It usually last two to five years, although there are longer terms available. When the fixed rate ends, the interest rate reverts to the lenders standard variable rate.
Flexible mortgage
This type of mortgage offers an interest rate that is variable and that is calculated daily rather than annually, which means that any capital repayment of the loan will affect the interest charged on the outstanding balance at once. It is flexible as you can make unlimited overpayments without being charged an early repayment fee.
100 per cent mortgage
These mortgages are a loan for the full purchase price of the property, although the lender will charge a higher interest rate than they would for a mortgage covering a lower percentage of the purchase price, and a larger higher lending charge premium than if you put some of your own cash towards the purchase price.
125 per cent mortgage
This type of mortgage allows you to borrow up to 125 per cent of the property value without having to take a secured loan with another lender at possibly a higher APR. They typically consist of a mortgage for 90 or 95 per cent of the value of the property with an unsecured loan for the balance of the borrowing. Both mortgage and loan are available at the same interest rate while they are linked, and are charged at a higher rate of interest than mortgages where you put down a deposit.
Offset mortgage
An offset mortgage allows you to pay off your mortgage early in a tax efficient way. You set your savings against your mortgage debt and by giving up earning interest on the former you don’t pay it on the same amount of your mortgage debt. Offset mortgage lenders calculate interest daily, so that all your money is working to reduce the cost of borrowing.
Pension mortgage
This mortgage allows the self-employed or people with a personal pension to link their mortgage loan to a pension plan. Once the mortgage term is completed, part of the tax-free lump sum of the pension fund is used to repay the capital outstanding. However, it also reduces the amount available for your retirement pension.
Self certified mortgage
These mortgages are available for customers who are employed and self-employed people who have a deposit to buy a house but do not have sufficient documentation to prove their income. Some lenders will need proof of employment status, such as an accountant’s certificate or an employer’s letter and will undertake a credit search.
Sub-prime mortgage
Subprime mortgages are risky types of consumer loans that are normally sold to people who would otherwise not have access to the credit market, have high default rates from bad or excessive debt, or a failure to pay off debts. Lenders normally charge interest on subprime mortgages at a rate that is higher than for a conventional mortgage to compensate themselves for carrying more risk.
Tracker mortgage
In a tracker mortgage, the interest rate is variable but set at a premium higher that the Bank of England base rate for a period or even the lifetime of the mortgage. It usually carries little or no redemption penalty, and allows interest to be saved on the mortgage without penalty, by overpayments. If the tracker rate is for a set time, the mortgage will revert to the lender’s standard variable rate at the end of the tracker rate period.
Variable rate mortgage
A variable rate mortgage is based on the lender’s standard variable rate, which is usually affected by movements in the Bank of England’s base rate. The standard variable rate varies depending on the lender, but is typically 1.5–3.5 per cent higher than the bank of England base rate.
