Types of mortgages

What is a mortgage? Unless you have a huge stash of cash sitting around, getting a mortgage is an essential part of buying a home. Unlike a normal loan, a mortgage is specifically tied to the specific house you are buying. You usually save up enough to cover a percentage of the value of a property, creating what is referred to as a deposit. The rest is made up with a loan from a mortgage lender. You pay your deposit and your lender pays the rest, making up the full amount which goes to the party selling the property. After this, you repay the amount you borrow, plus interest charged, to the mortgage lender.

The crucial point is that if you fail to pay your mortgage, your house can be taken away by the mortgage lender and sold to cover the loan that you’ve taken out. When buying a house, it is often a requirement to have life insurance. When buying life insurance, you will have the option to add cover for critical illness and income protection. This can act as a safeguard to help you cover costs like your mortgage, should you experience long-term changes to your income. 

When you’re buying a house for yourself, there are two main mortgage types to choose from. You have the option of a repayment mortgage or an interest-only mortgage. With a repayment mortgage, you gradually repay the amount that you’ve borrowed, which is known as the capital. Each month, some of what you pay goes towards paying off the capital, while the rest covers the interest. By the end of the repayment mortgage term, usually somewhere between 25 and 35 years, you will have repaid everything you borrowed.

There’s also the option to choose an interest-only mortgage. These are a less standard option and have strict criteria for eligibility, including high incomes, a large deposit and a solid plan for paying back the capital. With an interest-only mortgage you usually have lower monthly payments because you’re not paying off the actual money that you’ve borrowed. You’re paying just the interest. It’s up to you to make arrangements to pay off the original loan – the so-called capital – at the end of the term. People can do this either by selling their property or devising a savings and investment plan to accumulate the capital amount they will owe.

When it comes to interest rates, the interest rate on a mortgage is related to financial market interest rates. This includes something called the base rate, which is a percentage set by the Bank of England. It’s based on background economic factors. The Bank of England announces any changes to the base rate each quarter, although they sometimes keep them the same. Mortgage lenders use the base rate to offer borrowers a number of options when it comes to the cost of borrowing.

Mortgage lenders rates are almost always higher than the base rate. A mortgage interest rate can be fixed or variable. A fixed rate mortgage guarantees your interest rate for, say, five years. It may be a higher rate than other available deals, but it does give you the security of steady payment each month with no nasty surprises. On a variable rate mortgage, the monthly payment can change based on what is happening to the base rate.

If the base rate goes down, you could pay less, but there’s a chance that it can go up, leaving you to pay more each month. If you take a variable rate mortgage, you agree to unknown changes in your monthly payments. If you’d like to know more, watch our video on repayment options. A mortgage is simply a way of spreading the cost of a home over many years. Different types of products offer varying levels of security and flexibility.

By understanding how deposits, interest rates and repayment options work, you can choose a mortgage that fits both your budget and your long-term plans. The right mortgage isn’t just about getting the keys, it’s about making sure your home remains affordable and secure for the future.