Key Types of Mortgages
The key types of mortgage are set out below:
Capital & Interest Mortgage
(Also known as a "repayment" mortgage) With this type of mortgage you pay a combined monthly payment of interest and capital to your lender and, over time, your loan gradually reduces in size as capital is paid off.
The lender may insist that all individuals involved in the loan take sufficient life &/or critical illness cover to repay the whole mortgage, and it is good practice to do so, even if they don’t insist on it. A repayment loan, provided you meet the required payments, is guaranteed to eventually repay your mortgage.
Interest Only Mortgage
With this type of mortgage the monthly payment to the lender consists of only interest, with all capital borrowed being repaid at the end of the mortgage term. This is usually financed by a repayment plan, such as an endowment, ISA, or pension. Often these plans will incorporate protection cover against death or serious illness.
These products contain no guarantees to repay the whole of the mortgage debt at the end of the term and it is the borrowers responsibility to ensure that any repayment vehicle is maintained. The whole of the loan remains outstanding at the end of the term and it is the responsibility of the borrower to repay the whole amount of the loan when it falls due.
It is possible to have a combination of the above two types and the same comments apply to each proportion of the mortgage.
(Sometimes known as an "Offset" mortgage) – Quite a sophisticated product. With this type of mortgage there is a minimum amount that you can repay each month, but you gain flexibility to vary the amount of your repayments, Interest is calculated on a daily basis and there may be additional borrowing facilities.
Some months you can overpay thereby reducing the loan amount quicker. The actual terms and conditions vary with each lender and product. These products are called Flexible, due to their ability to accept capital repayments at anytime, (normally without penalty). Most lenders offering these products charge interest on daily basis, which is generally more advantageous than annually.
Importantly, most of these flexible mortgages allow further loans at any time, thus allowing you to borrow back any overpayments, making the overall structure of the loan very efficient in terms of overall financial planning. A recent addition to the range of flexible mortgages is the facility to offset interest from savings held in the same plan against mortgage interest. These "One Account Plans", allow you to take various products within the same plan, e.g. current / savings accounts, credit cards, personal loans and mortgages.
It is still your responsibility to ensure you are able to repay the mortgage at the end of the term.
Your home may be repossessed if you do not keep up repayments on your mortgage.