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UK Mortgage introduction

There are many different mortgage products in the market place today - the list grows every day to reflect increasing competition as lenders jockey for position with new products to tempt borrowers. At the same time, different mortgage products offer different solutions to a wide range of requirements by borrowers to help them combat the effects of the dynamic nature of the property market. Choosing the right mortgage can be one of the most confusing decisions that anyone ever has to make. If you're thinking of moving, buying a house for the first time or want to change your current mortgage arrangements, how do you decide which mortgage to choose? The choice can be complex and confusing. This publication will help you to decide the best mortgage to suit your

What are the options

Repayment Mortgage

This type of mortgage requires a monthly payment of capital and interest so that gradually over the mortgage term the loan is paid off. Lenders normally require some form of Life Assurance to be taken out in conjunction with this type of mortgage.

Endowment Mortgage

With an Endowment Mortgage there is a regular monthly payment of interest which remains unchanged (other than when interest rates fluctuate) throughout the mortgage term. At the same time premiums are paid on an Endowment Policy that matures at the end of the mortgage term and which is intended to provide the funds to repay the loan and, in some cases, a surplus of tax-free monies for the borrower. Until recent years, this was a very popular type of mortgage and it has with it several options including low cost/low start mortgages as well as Unit-Linked Endowment Policies and sometimes a hybrid arrangement of a mixture of different types of Endowment Policies. However, several endowment products have fallen way short of expectations and left policyholders with an unfunded debt to repay at the end of the mortgage term.

Pension Mortgage

These mortgages work in a very similar way to Endowment Mortgages but in this case a Pension Policy is taken out instead of an Endowment Policy. At retirement the Policy produces a lump sum sufficient to discharge the mortgage loan and leaves a residue that's taken in the form of pension. Pension Mortgages are most attractive for higher rate taxpayers and also for those who wish to link their mortgage to some form of retirement income planning.

PEP/ISA Mortgage

This type of mortgage was attractive to some borrowers but not all PEPs were accepted by all lenders. Personal Equity Plans were the most tax efficient way for private investors to put money into a stockmarket-related investment. PEPs finished on 5 April 1999 and are replaced by Individual Savings Accounts (ISAs). ISA mortgages work on the same principle as endowments: you invest in a fund which is expected to build up enough cash to repay the mortgage at the end of the term, usually 25 years. They could therefore suffer the same pitfalls as endowment mortgages if the stock market does not perform as expected.

Foreign Currency Mortgage

These provide a low rate of interest in exchange for a currency fluctuation risk.

Interest Only Mortgage

This type of mortgage only pays off the interest on a loan and does not pay off the capital debt part of the mortgage. The capital debt must therefore be repaid by the end of the mortgage term from a separate investment fund or alternative financial source.

Current Account Mortgage

Also known as an “Offset mortgage”, the mortgage operates as a bank account. You get a chequebook, direct debit facility, credit & cash card and regular statements etc. Your earnings are paid straight into this "mortgage/bank account" and you pay interest on the current balance.

Letting Mortgage

This is a mortgage or remortgage (i.e. a mortgage on your current property replacing any existing mortgage) for landlords who own a maximum of 2 properties to let, possibly in addition to a personal residential mortgage and who don't rely on the rental income to any great extent.

Flexible Mortgage

Instead of making an exact payment to your mortgage account each month, you can pay in your entire salary plus any bonus payments and savings that you might have. Then you use the account just like an ordinary current account. All the time there is excess cash in your account it is offset against your mortgage loan with interest being calculated on your mortgage balance daily. As you make extra payments you build up credit, to which you have access just like an ordinary bank account. This credit can total many thousands of pounds, and gives you the freedom to write a cheque for, say, a new car, schools fees, career break, payment holiday or building an extension.

Cash-back Mortgage

This is a mortgage or remortgage (i.e. a mortgage on your present property replacing any existing mortgage) of one of the types described in this Information Sheet with an added feature. A tax-free lump sum is paid to you as the borrower. The amount can be up to £15,000 and is paid on completion depending on loan size. It's yours to keep although if you pay off your mortgage early, then you'll have to pay back some or all of this windfall.