A Guide To The Different Types of Mortgage

Homeowner finances can be confusing to a lot of people because there are two strands of knowledge that you need; how to apply for a mortgage (the general process and costs) and the basic science of mortgages (what is actually out there on offer). This article describes what a mortgage actually is and the three main types.

What Is a Mortgage?

A mortgage is a sizeable loan of money specifically for the purchase of a property or home. It is a ‘secured’ loan, which means that the lender uses your home as collateral and if you do not meet your repayments they can ultimately repossess it.  Most lenders let you borrow three times the amount of the greatest income in your household, plus half of the second greatest (two and a half times the joint income). You will probably find a mortgage for up to 75% of the property price, meaning you will need to find the rest of the money yourself.

Repayment Mortgages

Repayment mortgages are paid back over a set number of years, usually around 25 years, with the addition of interest (the percentage increase of the value of the loan). This means you will repay segments of your mortgage each month, including capital and interest. The mortgage will gradually reduce as you pay more of it off, so the interest will also fall. This means that eventually your repayments will be proportionately higher in capital than interest.

First time buyers are able to take out a Low Start Capital Repayment Mortgage. This mortgage scheme is designed to make repayments cheaper to begin with, because it consists of interest-only repayments for an initial period.

Endowment Mortgages

Endowment Mortgages are the simplest type of mortgage, but are less popular than the standard repayment mortgage. Endowment mortgages involve monthly payments made up of the interest on the loan and a contribution to an endowment policy (life insurance). The loan is then paid off in one lump sum with the proceeds from the life assurance policy. If you are making the interest payments during periods of low interest rates, you may have money left over after paying off your mortgage.

Pension Mortgages

Pension Mortgages are a good option if you have a personal pension scheme. Like with an endowment mortgage, a pension mortgage makes contributions into the pension scheme (rather than a life assurance policy). Every monthly payment will include the interest on the loan plus a contribution to your personal pension scheme. The lump sum created by your pension scheme is used to pay off the loan. It is important to note that you will need to a life assurance policy to cover you in case you die before retiring.