Types of Mortgage- What The Best Mortgage?

Types of mortgage

When you choose a mortgage, you'll need to think about the repayment method, interest rate deals and special features of some mortgages. The best one for you will depend on your circumstances - so it's important to understand your options and shop around for the best mortgage.

Repayment (capital and interest) and interest only mortgages explained; fixed rate, variable rate and other interest rate deals; flexible, current account and offset mortgages features Money, tax and benefits section. There are so many types of Mortgage such as:

Buy to Let Mortgage: A type of mortgage taken out by people who want to become landlords. It's a way of investing in property and bringing in an income.

Discount Rate Mortgage: A mortgage with a guaranteed reduction in the variable mortgage rate (say, 2% below the variable, whatever it may be). Generally lasts for an agreed period and if you change mortgages within that time, you will pay a redemption penalty.

Current Account Mortgage: A type of mortgage in which your debt is effectively held in your current account. Interest due is calculated daily as opposed to yearly, which can make a significant difference to the cost for those on a REPAYMENT MORTGAGE. Also more flexible and allows periods of both under- and overpayment of the mortgage to suit the borrower's changing financial circumstances.

Capped Rate Mortgage: The mortgage interest rate cannot go above a certain level, even if mortgage rates rise, but can fall down as rates drop. Ain't no free lunches, though, and if you want to extricate yourself from the mortgage during the capped rate period (say three or five years), you'll have to pay a redemption penalty.

Stepped Rate Mortgages: A bit like a discount mortgage except the interest rate goes up in stages rather than in one fell swoop. They comprehensively fail the Foolish maxim of "keep things simple" and are best avoided.

Interest Only Mortgage: Monthly payments to the lender are made up simply of interest. You don't pay off any of the capital of the mortgage during the term of the mortgage, but do so at the end, having accrued a large enough pot of money in an investment fund. Classically, these investment funds have been endowments, but we're pleased to say that ISAs are increasingly being used.

Leasehold Mortgage: If you buy leasehold mortgage, you only own the property itself for an agreed period of time - not the land on which it is built. An example of this might be a 99-year-lease on a flat where you pay an annual rent (called the "ground rent") to the owner of the freehold of the building which contains your flat. At the end of the 99 years the property reverts to the "freeholder" of the building. The value of your flat will decrease as the lease gets shorter.

Remortgage: When you move your mortgage to another lender. You might be able to get a better deal, but watch out for redemption penalties. Also, it's always worth checking to see whether your current lender can give you a better deal before going to the extra trouble and expense of moving to another.

Repayment mortgage: The monthly repayments pay off both the interest and some of the capital on the mortgage. By the end of the mortgage term, the debt has all gone and the house is all yours.