There are many different types of mortgages available from High Street Lenders. Below is a list of the majority of main mortgages and how they work.

Repayment Mortgage

The monthly repayments are made up of part interest and part capital. At the beginning of the mortgage term, you will pay mainly interest so that the total amount you owe to the lender will reduce slowly. In the final years you will repay mainly capital. If you make all the repayments in full and on time your mortgage will be repaid at the end of the agreed term.

Endowment Mortgage

With an endowment mortgage only the interest is paid off with each monthly mortgage payment. The debt will never reduce and the borrower must repay the debt at the end of the mortgage, by taking out an endowment policy. The fixed payments for the endowment policy are based on the amount of the loan as well as the mortgage term and are designed so that at maturity, the amount invested and earnings are sufficient to pay off the interest only mortgage. There is no guarantee that when the endowment policy matures and pays out the balance it will be sufficient to repay the mortgage.

Flexible Mortgage

Flexible mortgage is designed to let you make additional mortgage repayments when you have any spare money and to reduce, or even skip mortgage payments when necessary with a flexible mortgage. You normally have to build up a reserve through overpayments before being allowed to underpay or skip mortgage payments. The interest is calculated on a daily basis and any overpayment reduces the mortgage balance immediately and the borrower will be charged less interest from the following day.

Fixed Rate Mortgage

With this type of mortgage you and the mortgage lender agree to fix the interest rate on your loan for a set period of time. Fixed rate mortgages do not change even if the interest rates rise or fall. The period of time is usually between 1 and 5 years, but longer fixed rate periods can be found in the market. After the agreed period the interest on your loan will normally revert to the mortgage lenders standard variable rate. If you want to leave before the agreed term the early redemption penalty is usually significant.

Tracker Rate Mortgage

Tracker rate mortgage has a variable interest rate that can rise and fall in line with the market conditions, it can be directly linked to the Bank of England base rate or London interbank offered rate. Any reductions in the interest rate announced by the Bank of England monetary committee will result in a reduction in your monthly repayments, although any increase announced to the Bank of England base rate will result in an increase in your monthly mortgage repayments.

Capped Rate Mortgage

Capped rate mortgages are supposed to offer the best of both variable and fixed rate deals. The difference in the capped rate is that if the variable rate drops below the capped rate the borrower will make mortgage payments based on the lower variable rate. If the interest rate increases over the capped rate the payment will not exceed the capped rate. So as interest rates rise or fall so do your capped rate mortgage repayments, but your mortgage repayments will never go over the capped rate that you have agreed.

Discounted Rate Mortgage

A discounted rate mortgage is an interest repayment variation. Some lenders will offer new customers a discount on their standard variable rate for a set period. Your payments will go up and down, but you are paying less. After the agreed period the interest rate will switch to the lenders usual variable rate. If you decide to get a discounted rate mortgage it is worth bearing in mind that although it may be helpful to have a lower rate of repayment in the beginning, you must be able to keep up with mortgage repayments until the end of the mortgage contract as your interest rate may get more expensive.

Buy to Let Mortgage

The difference between a buy to let and a residential mortgage is the percentage which the mortgage lender is willing to lend will more than likely be restricted to 80% of the value of the property and you will have to pay a large deposit. Interest rates for buy to let mortgages also are likely to be more than those of a normal residential mortgage. When you sell the property you may potentially be liable to Capital Gains Tax at your highest rate of income tax.

The information is intended to be a general guide on Mortgages. It is not to be relied upon nor as an alternative to taking professional advice.