Looking for a mortgage? There’s a dizzying array of choice in today’s market.
But fear not, here is Castle Trust’s guide to (nearly) everything you need to know about the main types of mortgages.
Shared equity borrowers buy a home with a repayment mortgage from a primary lender for some of the value, while securing the rest from a shared equity provider. The government provides shared equity through its Help to Buy scheme. In the case of Castle Trust’s Partnership Mortgages, the primary lender provides up to 60%, while Castle Trust lends 20% to homebuyers with a deposit of at least 20%.
With shared equity, there are generally no ongoing payments. Instead, when you sell your home the shared equity provider shares any increase in value or any losses, reducing the risks of homeownership.
While the type of traditional mortgage you choose may depend on your outlook for interest rates, where you think house prices are going may dictate whether you think shared equity is right for you.
Traditional mortgage types
- Repayment (or capital and interest)
Each month you repay an element of capital as well as the interest on the debt. The amount borrowed decreases throughout the term and by the end of the loan term has been fully repaid.
With this type of mortgage, each mortgage payment only pays the interest due. At the end of the mortgage term you need to repay the capital. Recently lenders have started to withdraw their interest-only offerings because of concerns that borrowers don’t have an appropriate repayment vehicle in place to pay off the capital at the end of the loan, leading to headlines of a ‘interest-only time bomb’.
- Standard variable rate (SVR)
The Standard Variable Rate of interest is set by the mortgage lender, who can alter it as and when they decide. The SVR varies from company to company and the differences between different lenders can be significant.
As the name suggests, you pay a fixed rate of interest for a set period. When the fixed period ends, you’ll usually move to the lender’s standard variable rate
There is an attractive discount off the lender’s SVR rate for a set period. The rate will fluctuate in line with changes in the SVR. At the end of the set period the rate will revert to the lender’s SVR.
- Capped (or cap and collar)
This type of mortgage has a cap (or ‘rate ceiling’) on the interest rate payable on the outstanding balance, meaning it will not increase above the pre-agreed rate. Similarly, the rate will not fall below the ‘collar’.
Tracker mortgages are usually set at a level above the Bank of England Base Rate. The mortgage could track the Base Rate for a fixed period or the lifetime of the loan.
Offset mortgages allow you to ‘offset’ the amount you owe against savings you have with the lender, so you only pay interest on the net amount at any time.
Of course, with a major decision such as the purchase of your home, there are many, many considerations. But this should give you a good summary of some of the different ways to pay for it.