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The Online Mortgage Company
With so many different products in the market, you'd be forgiven for not knowing what the most suitable product for you is. The Online Mortgage Company will ensure that you go away not only confident that you have the most suitable mortgage product, but also, it is essential to us that you fully understand the products you've been recommended.
Although there are many products in the market, in basic terms, there are only 2 repayment methods available. Repayment Mortgages, and Interest Only Mortgages. There are then many different features based around these two mortgages. This page is built as a guide to Repayment Mortgages, Interest Only Mortgages and all the different product features around these.
Repayment Mortgages
A repayment mortgage (also known as Capital or Capital and Interest Mortgage) ensures that your mortgage is paid over a pre determined period of time in full. The repayments consist of 2 elements; interest and capital. In the early stage of the mortgage, the repayments will mainly consist of interest and a small amount of capital. In the later stages of the term, this will reverse and your repayments will mainly consist of capital.
Interest Only Mortgages
Interest Only Mortgage repayments consist only of an Interest element. These typically run alongside an investment product of the borrowers' choice (although some lenders can insist that the investment element is invested with them). The investment product is then used to pay off the capital element of the mortgage at the end of the term and may provide a surplus. Whilst interest only mortgages do have the advantage of providing an investment opportunity, the flip side is that the investment product may not be enough to pay off the mortgage at the end of the term leaving the borrower with a shortfall.
Please chose a product feature below that you feel most closely represents your requirements:
> Fixed Rate
A fixed rate mortgage is a mortgage where the lender charges a specified rate for an initial period. At the end of the initial period the rate usually changes to the standard variable rate offered by the lender. The lenders standard variable rate will vary roughly in line with market rates and may therefore be higher than the fixed rate.
Fixed rates usually last for between 1 and 5 years, although some lenders offer deals that last for 10 years or even longer.
The advantages include the fact that you know how much your mortgage will be costing you for that initial period and if interest rates go up, you won't pay any extra.
The disadvantages include the fact that if interest rates go down, you will not benefit from lower repayments and fixed rate deals often have early repayment charges.
> Capped Mortgages
A capped rate mortgage is one where the lender specifies a maximum interest rate for an initial period. At the end of the initial period the rate usually changes to the standard variable rate offered by the lender. The lenders standard variable rate will vary roughly in line with market rates and may therefore be higher than the fixed rate.
An additional variation on a capped rate mortgage is a 'collared' which limits how low the rate can go, so a 'capped and collared' mortgage has both an upper and a lower interest rate limit and can vary between the two.
Advantages include the fact that you know the most your mortgage will cost you for that initial period and if the lenders standard variable rate falls below the cap, you pay the lower amount.
The main disadvantage is that such arrangements often have early repayments charges.
> Discounted Rates
A discounted mortgage is one where the lender charges less than its standard variable rate for an initial period. At the end of the initial period the rate usually changes to the standard variable rate offered by the lender, which will be higher.
Advantages include the fact that you pay less for the initial period and benefit from any reductions in the standard variable rate.
Disadvantages include the fact that if the standard variable rate goes up, so do your monthly repayments. Discounted deals often have early repayment charges.
> Flexible Mortgages
A flexible mortgage is one, which includes one or more options to vary the rate at which you pay it back but without charging an early repayment charge.
The typical options available are Overpayments, Underpayments, and Payment Holidays.
There are two types of overpayments:
Firstly you can increase your monthly payments to reduce the outstanding debt quicker, which means you could clear your mortgage earlier than the intended term,
Secondly, you can make occasional lump sum payments to reduce the debt.
Some mortgages allow the borrower to reduce the monthly payment. If you use this option you will need to remember to clear the outstanding amount as soon as possible afterwards, with a lump sum or by paying an additional amount each month. If you don’t clear the outstanding amount the increase in your mortgage debt will mean it may take you longer to repay your mortgage and you will end up paying more interest.
Some mortgages provide the option to take a payment holiday. This means you stop making payments for a period of time. The missed payments are added to your mortgage debt, which may mean it will take longer to repay and increase the amount of your mortgage.
These mortgages can be particularly beneficial if your income is variable, or if you are likely to come into money in the near future; however, you must make sure you understand the terms of each option, as it possible to increase the amount you owe if you misunderstand them.
> Current Account Mortgages
A current account mortgage is a type of offset mortgage that uses the balance of your current account to offset the amount owed on your mortgage; for example, you have a £60,000 mortgage and £5,000 in your current account, so you pay interest on £55,000.
Advantages include the fact that you still have full access to your account and the money is effectively earning interest at your mortgage rate, which is almost always higher than the equivalent savings / current account rate, and, unlike savings interest, you do not need to pay tax on it.
Disadvantages include the fact that inflation can erode the value of the funds in your account, as they are not actually earning any interest. It is also possible to substantially increase your debt through lack of discipline; if you do not think carefully about your spending you may not offset very much interest, and if the mortgage allows you to withdraw more you may find you have increased the level of the debt.
> Libor Rates
A LIBOR rate mortgage is a variable rate mortgage that tracks the LIBOR rate, the London Interbank Offered Rate (LIBOR), the rate at which banks notionally buy and sell money to each other; for example, your interest rate might be set at 1.5% above the LIBOR rate.
Advantages include the fact that you are guaranteed to benefit in full from any fall in the LIBOR rate and that the interest rate you pay can’t rise by more than the rise in the LIBOR rate.
Disadvantages include the fact that if interest rates rise, your rate will rise with them.
> Base Rate Tracker Mortgages
A Base Rate Tracker mortgage is a variable rate mortgage that tracks the Bank of England Base Rate. Your interest rate will be based on a percentage above the Base Rate; for example, Base Rate + 1.5%
Advantages include the fact that you are guaranteed to benefit in full from any fall in the Base Rate and that the interest rate you pay can’t rise by more than the rise in the Base Rate
Disadvantages include the fact that if interest rates rise, your rate will rise and some tracker mortgages deals come with early repayment charges.
> 100% Mortgages
A Mortgage where the loan amount is equal to the purchase price therefore no deposit is required.
> Daily Interest Mortgages
Mortgages on which the interest is calculated on the daily outstanding balance.
> County Court Judgments (CCJs)
CCJs are judgments for debt in the county court. If a judgment is settled in full within 30 days of the date of the judgment it will not appear in the credit register.
If you have had credit problems you must disclose these to the lender. This may not prevent you getting a mortgage, it depends more on the reasons for your debt and the way in which you have chosen to settle this.
If you are considered to be a poor credit risk lenders may still be prepared to offer you a loan, but it could be at a higher rate of interest than the ‘normal’ rates offered.
> High Income Multiplier Mortgages
A mortgage where the income is multiplies that exceed those normally applied
> Cashback Mortgages
An incentive payment made by the lender to the borrower upon completion of a mortgage. Payments made as cashbacks may be treated as gifts and subject to capital gains tax.
> First Time Buyer Mortgages
A person wishing to purchase a property for the first time. Some lenders offer preferential lending terms to first time buyers.
> Remortgage
Arranging a loan on a property in which the borrower already resides. Normally this involves redeeming an existing loan on the property.
> Buy to Let Mortgages
A term used for the borrower who wishes to buy a property to let out.
> Self-Employed Mortgages
A Self Employed Mortgage works on the same principle to a P.A.Y.E mortgage. In most situations the lender will require at least three years net profits
> Variable Rates
The standard variable rate is the rate the lender charges on ‘normal’ mortgages. The interest rate you pay will broadly reflect movements in market interest but unlike mortgages that specifically track a particular interest rate such as the Bank of England base rate, this is not guaranteed.
The advantages include the fact that there are usually no early repayment charges and when the base rate reduces, so does your monthly repayment amount, although not necessarily immediately, or by the same amount.
The main disadvantage is that if the base rate rises the amount of your monthly repayments will increase.
> Arrears
Mortgage payments that have not been made by the due date in accordance with the mortgage deed
> Self-Certificate Mortgages
Mortgages specifically designed for those individuals who are unable, or unwilling, to provide documentary evidence of their incomes.
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