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Types of Mortgages

Are all the different types of mortgages shown on TV, in the press and the constant leaflet drops driving you bananas?

Let The mortgage monkey peel away the jargon and explain the variety of options!

Types of mortgages

Current Mortgage Rates vary on a daily basis. There are a vast variety of types and structures of mortgages available in the mortgage market. Gone are the days when you had only a couple of options! Increased competition has led to sexier mortgage offerings with increased flexibility. Mortgages have evolved through consumer demand and product development. However, this has unfortunately led to increased confusion for the consumer over the variety of mortgages available and how they operate.

The mortgage monkey has therefore summarised the main types of mortgages below to help provide clarity in this ever-increasing and diversified market.

Each chart below will give you a brief description as to how the mortgage works, the likely charges if you repay your mortgage early and an Is it for you? You should speak to one of our experienced consultants to help explain this Jungle of terminology.

Flexible mortgages

 
Some of the above types of mortgages can also offer a degree of flexibility, although the extent can vary from one lender or product to another. As a general rule of thumb, the more attractive the deal, the less flexibility offered. Fully flexible mortgages tend to operate at the lenders standard variable rate. A flexible mortgage gives you some scope to change your mortgage payments to suit your ability to pay. It's also useful if you want to pay off your loan more quickly. Several flexible features are becoming increasingly common and they are not necessarily confined to loans that have 'flexible' in their name.

Consider which of the features below are important to you.

Overpayments

You can pay more than the normal monthly mortgage payment and/or pay off extra chunks of the loan. The overpayments can have two effects:
You could benefit straight away from lower monthly interest payments (because the amount you owe is now less); or You could continue paying at the higher level and pay off your loan more quickly. Sometimes you can cut years off your mortgage if you overpay regularly. To get the benefit of overpayments straight away, choose a mortgage where interest on what you owe is calculated daily or monthly.True flexible mortgages will not have penalties for making overpayments. However, with some other mortgages, especially fixed rate mortgages, you may have to pay an early repayment charge if you overpay by more than a certain amount. This will be detailed on your mortgage offer.

Underpayments and payment holidays

You pay less than the normal monthly payment for a limited period (eg: 6 or 12 months). You may even be able to take a payment holiday and stop making payments altogether for a while. This could be useful if, say, you lose your job or take maternity leave or a career break.
In either case, most lenders require you to have built up some overpayments first. While you are making underpayments or taking a payment holiday, interest continues to be charged and added to the outstanding loan. This means that you will have to pay higher repayments in future to get back on track, or you might need to extend the term of your mortgage to keep the normal repayments affordable. Either way, you will usually end up paying more for your mortgage in the long run.

Borrow extra (sometimes called 'loan drawdown')

This facility enables you to borrow extra without further approval from your lender, provided the total loan does not go over a pre-set limit. Alternatively, you may be able to 'borrow back' against earlier overpayments. With a more traditional mortgage, you usually need to apply for a top-up loan (also known as a further advance) which could take longer to arrange.These flexible features are just some aspects of a mortgage. You also need to consider the other features, the cost of the mortgage, and the type of interest rate.

Is a Flexible mortgage right for you?Yes, if you are likely to use these features. Possibly not, if you are unlikely to use these features. A mortgage that is not as flexible may be cheaper or more suitable for you because, for example, it charges you a lower interest rate, or offers you the security of fixing your payments for a period of time.
Once you and our consultants have decided which type of mortgage is right for your circumstances, you will need to decide on which basis the mortgage is set up. You have three choices:

Interest only mortgage
Capital repayment & interest mortgage
A split between the above two main structures
Your home may be repossessed if you do not keep up repayments on your mortgage.
 
If we charge a fee for arranging a contract for you, the amount payable will be based on 0.35% of the value of the loan applied for, with a minimum of £500. In a small number of circumstances, it may be necessary for us to charge a higher fee. This will be agreed with you in writing prior to any chargeable work commencing.

 
 
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