What are the mortgages I can choose from? All types of mainstream and niche mortgage systems explained

There are a lot of mortgages out there. Only one of these mortgages is perfect for you. We advise you to spend a lot of time informing yourself before making a choice. The difference between a good choice and a bad choice may be of thousands of pounds of unnecessary mortgage costs.

The two most important elements of a mortgage are the interest rate charged and the capital repayment method. In addition to these two elements a particular type of mortgage might also stand out because of the discounts it offers.

In the following, we will give you a full list, description and analysis of all possible mortgage types that lenders offer.

The names of the mortgages are self-descriptive in most cases but there are also a lot of case specific details that will prove to be very relevant over the course of you mortgage.

We have divided mortgages into three categories: Repayment Mortgages, Interest-Only Mortgages and Specialized Mortgages.

Repayment Mortgages

Repayment mortgages are the most common type of mortgage. Basically, the borrower can obtain a percentage of the property purchase price, usually from 75% to 100%, which is paid back in monthly installments with attached interest. As you will see there are many variations of interest rate that can differentiate between repayment mortgages.

Fixed Rate Mortgage

A fixed mortgage is a mortgage with an interest rate that stays unchanged regardless of market changes but only for a certain period of time, from 1 to 5 years or more. For the fixed rate mortgage, the interest rate should be a percentage lower than the standard variable rate. After the initial fixed interest rate interval has expired the interest rate reverts to the lender's variable standard rate.

The advantage of this type of mortgage is that you know what you will be paying in interest and you can plan your finances accordingly. One other advantage is that, if the variable standard interest rate goes up you will have saved some money in interest. In addition to the rate discount, depending on the lender there may be some fee discounts as well.

The disadvantage of a fixed interest rates is that if the variable standard interest rate goes down you will not be able to take advantage of the reduction.

Capped Mortgage

A capped mortgage is a mortgage with an interest rate that fluctuates and has a maximum limit above which it can not go. In other words, the initial interest rate that you agreed upon with your lenders will go down but will only go up to a certain maximum level. Some capped mortgages will also have some discounts on the fees.

The advantage of this type of mortgage is that you can profit from interest rate drops and you can also plan your finances knowing the maximum costs of your mortgage.

The disadvantage of this type of mortgage is that the initial interest rate that you will pay will be higher than a fixed interest rate or a discounted interest rate.

Discount Mortgage

A discount mortgage is a type of mortgage with a interest rate that, for the agreed period of time, will be a certain percentage lower than the standard variable interest rate. The discounted interest rate will fluctuate but the discount will be maintained over the course of any possible fluctuation.

The advantage of discount mortgages is that regardless of market changes you will have a discount as long as the offer is valid.

The disadvantage is that you can be drawn to a lender with a significant discount rate and not realize that he has a high variable standard interest rate and can end up with not such a advantageous deal after all.

Base-Rate Tracker Mortgages

A base-rate tracker interest rate is a type of discounted interest rate that instead of being calculated as a reduction of the standard variable interest rate set by the lender it is a fixed increase of the base lending rate set by the Bank of England.

The ups and downs of this system are the same as with the discount mortgage with the added advantage that the lender cannot influence your rate in any way since the rate is only dependent on the base-lending rate set by the Bank of England.

Current Account Mortgage

The current account mortgage is a very beneficial type of flexible mortgage. In fact, it is a very flexible type of mortgage. Your spending account and your mortgage account will be one and the same. Your earnings will be deposited into this account, you will have credit or debit cards associated with it.

The best thing is, your interest will be calculated daily, based on the account balance that will be deducted from the capital sum which, in turn, is the base of calculation for the interest. So, over time, your interest will be significantly reduced and, in the event that you would need it, you have a cash reserve.

The disadvantage is that you can get carried away and overspend. In extreme cases you can end up with an unpaid capital sum at the end of the mortgage and huge interest costs paid in vain.

You may have a discounted or fixed interest rate, but, as always, for a limited amount of time. This mortgage will only work best for you if you can be a disciplined spender, otherwise you can get into serious trouble.

100% Mortgages

100% mortgages are mortgages with a specific name not because of distinctive differences in capital sum payment method or any particularity of the interest rate but because the lender will give you the full amount needed for the purchase of the property.

It may seem tempting not to have to make a significant financial effort in the beginning but no matter what type of interest discount you will have associated with the mortgage it will be higher than with a regular mortgage.

In the long term you will end up paying more than you should and the financial stress will be higher than the stress of borrowing the initial sum from a friend or relative or the stress of waiting a while until you can save a little more.

However, if you must use this type of mortgage it is best to spend some time looking for the best deal.

Offset Mortgage

An Offset Mortgage is a type of flexible mortgage very similar to the current account mortgage. The balance in a chosen account is deducted from the capital sum to which the interest is applied. The account may not be a current account as with the current account mortgage.

As with the current account mortgage the danger of this system is overspending and being short of the capital sum at the end of the mortgage term.

Fee Free Mortgage

Fee free mortgages are not really different from regular mortgages and can come in many forms. These mortgages are distinguished as fee free mortgages because of the fact that the lender will pay for the initial fees associated with a property purchase.

Be careful before opting for a fee free mortgage. In most cases the interest rate charged, even discounted, is higher than that offered for regular mortgages and it may be much more expensive for the long term.

Also, a fee free mortgage is free of fees at the beginning (initial fees) and you will still have to pay exit fees. For more information, please refer to our mortgage fee guides.

Cash Back Mortgage

A cash back mortgage is a type of offer attached to a regular mortgage rather than a significantly different type of mortgage. In this system, alongside the payment made to the seller of the property, you will also receive an amount of money yourself that you might use for furniture, improvements, moving and so on.

Although it sounds good, cash back mortgages usually come with higher interest or extensive tie-ins. It very rarely a good deal and you might be better off borrowing or obtaining money from other sources.

Self Certification Mortgage

Self certification mortgages are relatively new to the market. These mortgages are intended for people which can not provide evidence for their full income they earn or for a portion of it or simply do not want to.

Be it that these people are self-employed, are on a flexible income scheme or do not want to reveal their income source or volume; all can opt for a self-certification mortgage.

The borrowing limit varies from lender to lender but usually it is the same as with regular mortgages.

Self-certification mortgages are not mainstream mortgages hence it may be a little bit more difficult to find one. Be thoroughly informed before you chose a self-certification mortgage and compare interest rates available for other mortgages before committing to a specific mortgage.

Fix and Track Mortgage

The fix and track mortgage is a new type of repayment mortgage. The interest rate starts out as a fixed interest rate and usually after one year becomes a base tracker (sometimes tracking way above the base lending rate), base tracker that lasts for some years after the fixed interest rate is no longer applicable.

This mortgage is practically a combination of the fixed and base tracker mortgage. It is best to opt for this particular mortgage at a time when interest rates are growing but there are strong indications that the trend will subside and a period of stabilization will follow.

In exchange for this type of flexibility and comfort fix and track mortgages have extended tie-in clauses and a subsequent base tracker interest rate above other base tracker interest rates offered by other lenders for a regular base tracker mortgage.

Before opting for such a mortgage we advise that you inform yourself of your lender's conditions and take into account the market trends as well as your financial resources.

Interest-Only Mortgages

Endowment Mortgage

An endowment mortgage is a type of interest-only mortgage. Interest-only mortgages work by allowing the borrower to only pay monthly interest on the capital sum and repay the capital sum at the end of the mortgage term.

Because normally, you should have a provision for the payment of the capital sum at the end of the mortgage term some mortgage lenders offer a side investment or saving scheme alongside the interest-only mortgage.

One such mortgage with a investment plan attached is the endowment mortgage. The endowment mortgage offers a stock market investment plans for the investment of the capital sum installments that is intended to pay off the mortgage at the end of the term.

This type of mortgage was popular in the 80's and 90's when stock market predictions were optimistic. The problem back then was that actual performance fell short of predictions and many came up short at the end of the mortgage term.

The same danger exists now and constitutes the main disadvantage of this particular type of interest-only mortgage.

ISA Mortgage

A ISA mortgage is a type of interest-only mortgage. As with all flexible mortgages the monthly payments consist of interest. The provision for the payment of the capital amount at the end of the mortgage term is the balance of the ISA (Individual Savings Account).

There are two types of ISA's that you can attach to a mortgage. One is the regular type of saving account and the other is a equity savings account that is used by your financial provider for investments on the stock market.

If you wish to attach a equity savings account to your interest-only mortgage be aware of the risk that your equity investments could come short of the performance projections and leave you with a considerable gap between the account balance and the capital sum at the end of the mortgage.

The attraction of ISA, which is a saving scheme particular to the UK, is that, up to a certain amount, the interest earned is tax-free. The tax exemptions applicable to a equity ISA are a bit more complex and may not be worthwhile for the average consumer but regular ISA's are well worth a look.

When opting for ISA mortgage consider whether you can be a disciplined saver or not and always shop around for the best deal both for the interest rate applied and for the equity investment strategy.

Pension Plan Mortgage

A pension plan mortgage is a interest-only mortgage by which the borrower pays monthly installments consisting solely of the interest owed for the capital sum. The provision for the payment of the capital sum borrowed, for this type of mortgage, comes in the form of a pension plan.

A pension plan has tax relief advantages just like an ISA account with the significant difference that you cannot make withdrawals in the initial period.

Not being able to make withdrawals may be to your advantage if you are not a disciplined saver.

The danger of this system is that since your savings will be invested on the stock market, your investment may not do as well as you hoped and you might find yourself short of the capital sum at the end of the mortgage term.

Specialized Mortgages

Bad Credit Mortgage

Bad credit mortgages are repayment mortgages especially designed for people who have had trouble with loans in the past and have been labeled as adverse credit cases.

First of all, it is important to know that these mortgages will come with higher than average interest rates.

The conditions for bad credit mortgages may differ from lender to lender so shopping around could prove to be a smart move.

Be very careful when making such inquiries. Each inquiry you make with a lender will probably produce a short credit check on the part of

the lender. Such credit history checks can be done in an instant, even as a result of a telephone conversation with a lender and they do stay on-record and can be seen by other lenders. These searches can be interpreted as inquiries followed by refusals rather than informative inquiries.

A credit inquiry that will be interpreted by other lenders as a refusal will deepen the whole that you are already in so proceed with caution or better yet, use the services of a independent credit adviser or broker.

Buy-to-Let Mortgage

In recent times it has become possible for property owners to be accepted for mortgage loans as opposed to being eligible only if not already owning real estate.

Lenders have mortgage products aimed at this segment.

The popularity of this type of mortgage has risen because it has come to be seen as a very stable pension scheme and with the added benefit of tax advantages of pension fund investments, lenders have been forced to see a viable market in buy-to-let mortgages.

There are certain things to be careful about before choosing to invest your pension fund in this type of mortgage. First of all, be sure that the property you intend to buy would be an attractive rental. Second of all, treat this mortgage as if it were your first and as if your financial security were dependent on it because, well, it may be.

The tax exemptions are well worth a thorough inquiry as many of the legal provisions may not be in place yet.

In other words, when opting for a buy to let mortgage shop around for the best offer because even if buy-to-let mortgages are, in essence, regular mortgages it may be easier to overlook important aspects.

Divorce Mortgage

In recent time lenders have been coming up with mortgage packages especially designed for divorced people. These packages are usually attached to mainstream mortgage types including interest-only mortgages with a few additional customizations.

Lenders may offer of few months of no interest at the beginning of the mortgage term. Also, any earnings will include alimony and the LTV (percentage of the purchase value loaned to the borrower) may easily be 95% or even 100%.

As with all mortgages, be very careful, as lenders will try to take advantage of your urgency by overwhelming tie-in clauses or high interest rates.

Over 60 Mortgage

Mortgages for people over 60 exist. Some lenders in the UK will even give out mortgage loans to people up to the age of 80. Choices of interest rate and capital repayment type are usually as for a younger individual. All considerations, advantages and disadvantages of interest rates and repayment types are also the same as for other categories of borrowers.

The difference with mortgages for the elderly consist of the amounts or percentage of the purchase price that lenders will be wiling to grant you.

As you might have guessed, if you are over 60 the amounts that you can borrow are reduced, the older you are, the smaller the amount that you can get.

One other important limitation is a limitation of the mortgage term. If you are 60 it is likely you would get a maximum mortgage duration of 20 years and usually 15. The older you are, the smaller the mortgage duration you are likely to get.

Consider your income sources carefully and adjust your mortgage specifications in order to borrow as little as possible for a short as possible duration.

Because this is a specialized type of mortgage we advise that you use the services of a mortgage adviser that will analyze all the aspects of your mortgage needs and point you in the right direction as the offers are not as many as with other mortgage types.

Home Equity Mortgage

A equity release mortgage is a mortgage taken out on the part of the property you own that is free of financial obligations. Either you want to cash in on the added value that your property has gained during a price surge period or want to capitalize the paid off portion of your existing mortgage. There are a few elements you have to consider carefully.

Typically, you would have the same choices of repayment type, interest rate and mortgage duration as with other types of mortgages with a few subtle differences.

Since people resort to equity release mortgages at a later stage in their life it is important to chose a equity release mortgage that has a negative equity guarantee, meaning that if the property value drops, so will you your debt.

One other thing that you would want to make sure of is that by the clauses of the mortgage you and your spouse will be able to continue ownership of your property until your death and that following a liquidation the debt will not be transferred to your surviving relatives.

As with all mortgage we advise that you take great care in your choice of lender and consider the long term effects of interest rate and associated fees.

Guarantor Mortgage

Guarantor mortgages are mortgages that involve a third party that agrees to cover your payments in case you are unable to. A guarantor can be applied to any type of mortgage so, basically, any type of mortgage can be a guarantor mortgage.

The guarantor is usually a family member or a close friend that is willing to handle the financial strain of your mortgage should you become unable to honor payments. Just like you, the guarantor will have to prove his income and his financial history will have to be in accordance with the lender's requirements.

A guarantor is not used only in cases where the lender specifically requires a guarantor but also in cases where you would like to opt for a mortgage that is beyond your official or declared means. A guarantor strengthens you case and raises the maximum amount that you can borrow.

If you wish to become a guarantor in order to help a friend or relative, be very careful before doing so. Inform yourself of all the possible implications as they differ from mortgage lender to mortgage lender. In addition to the possibility of having to pay another person's mortgage installments a certain part of your income that is free of obligation may be blocked and impossible to count as income for a mortgage of your own.

Group Mortgage

The group mortgage is a relatively new type of mortgage offer. It's main characteristic is that 2 to 4 people can jointly take out a mortgage for the purchase of a property. Once the mortgage application is considered all the incomes of the mortgage participants will be considered, thus raising the maximum amount that can be borrowed.

If, for example three people take out a mortgage jointly, each will eventually own a third of the property. Each of their credit histories will be checked and a bad rating on one of the members will negatively affect the whole group.

In the event that you opt for such a mortgage it is important that all the members participate in every stage and decision related to the mortgage. These decisions would include the choosing of the actual property, the interest rate of the particular mortgage, the repayment option and the clauses attached to the mortgage.

Muslim Mortgage

Muslim mortgages are a new product on the mortgage market. Under Sharia (Islamic law) it is forbidden to lend money and receive interest without rendering any type of service. Borrowing under such a scheme is also forbidden.

Mortgage lenders have been coming up with mortgages specially design to comply with Sharia.

There are two mortgage systems compatible with Sharia. The first and most popular is the Ijara type mortgage which works by having the lender buy the property of your choice. After the property is bought the purchase price is repaid in the form of fixed monthly installments over a number of years, usually up to 25 years. In addition to the repayment of the purchase price the mortgage holder pays monthly rent over the period of the mortgage. The rent is set each year, is below the market level and decreases as more of the capital sum is repaid. Once the whole capital amount is repaid the property rights will be surrendered to the mortgage holder.

The second type of Islamic mortgage is the Murabaha type mortgage which works by depositing 20% of the purchase price of the property of your choice. The lender purchases the property after which he resells to you at an inflated price. After that the inflated amount is repaid to the mortgager over a period of usually no more than 15 years.

Although the Ijara mortgage is by far the most popular you will still have to be careful as offers differ between lenders and shopping around can save you thousand of pounds in rent payments over the life of the mortgage. The Murabaha type mortgage is much less popular because of it short duration and high costs.

Lifetime Mortgage

Life time mortgages are a form of equity release. Usually used by elderly people to provide extra income, lifetime mortgages allow you to obtain a part of the value of the property you own and still retain full ownership until your death.

With this type of mortgage you obtain a portion of the value locked in your property. This amount of money can be provided to you in a lump sum payment or in installments. Interest is added to the amount you receive and after your death the original or total amount you receive plus interest on it is recuperated by the sale of your property.

Even if the interest is deferred it is important what rate you choose, fixed or discounted variable, as it will be deducted from the maximum limit of equity release that your lender will allow.

All lenders that subscribe to the Safe Home Income Plan will have a negative equity guarantee. This protects you from drops in property value that would otherwise force you to repay the debt by other means than the sale of your property after your death.

Before signing this type of mortgage agreement make sure that it comes with a negative equity guarantee, make sure that your spouse will be able to retain full ownership of the property after your death and that the debt will not be passed onto your relatives if the sale of your property will not cover it.

Life Rate Mortgage

The life rate mortgage is a new type of product design to counter the remortgaging trend. Life rate mortgages are basically special offers that last for the whole duration of the mortgage. As mortgages today can last from a couple of years to even 40 years, lenders may offer flexibility in the type of continuous special offer they provide.

It may be wise, regardless of the specific mortgage you might be looking for, to scope the market and get a couple of life rate mortgage quotes complete with conditions and clauses.

If you are a regular costumer with not many specific difficulties it may be worth while to look into life rate mortgages as they might eliminate the need of constant remortgages and the administrative complications associated with remortgaging.

Final Word

As you can see, the choices are many. If you are the classical type of mortgage seeker then you have a lot of options. If you are somewhat different and have specific needs, nowadays, it is quite possible to find a mortgage suited for you. Even if a certain niche mortgage sounds perfect for you it may still be possible to obtain a better deal by opting for a mainstream type of mortgage for which you may be considered, much to your surprise.

Once you have chosen the type of mortgage it is well worth your time to have a read through the other guides as it is wise to be aware of all other adjacent costs and hardships that you might face.

Always remember that it is worthwhile to make yourself aware of all the possible options and the costs and implications of each. All it takes is a couple more hours of research. Not doing so may amount to thousand or tens of thousands of pounds in unnecessary costs over the course of the mortgage.