The types of mortgages

The word ‘mortgage’ generally means ‘to pledge’. It can be defined as an agreement between two parties, where one party, the debtor transfers the interest in a property to the lender in return for a loan. Nowadays, the two terms ‘mortgages’ and ‘home loans’ are used almost simultaneously.

The U.K. market is deemed to be one of the most advanced and technically innovative markets for mortgages. The main players in the market are mutual organisations such as building societies, credit unions or proprietary lenders such as banks.  

It has operated without much intervention of the government, but the nationalisation of one of country’s largest mortgage bank, ‘Northern Rock’ in 2008 coupled with the recent global recession, has led to a change in the already existing trend.

While taking a mortgage, most borrowers seek the help of a financial advisors or mortgage brokers who give them the best review of the market and suggest the most appropriate option at hand as per the person’s financial position. The key considerations are generally the amount which is dependent on factors such as credibility of the borrower, the amount needed, the person’s affordability, the term of the mortgage loan, the type of interest involved, etc.



Various types of mortgages are available in the U.K. market. The major categories can be named as:-

* Repayment Mortgages:-This is a method where the repayment of capital and interest is done. It is the traditional type of mortgage where the debt is divided into repayment of capital and the payment of interest, i.e., repayment of the amount borrowed and payment of interest for the loan given.



* Interest Only Mortgages:-Here, the repayment of the capital borrowed is made only at the end of the mortgage term. It consists of a monthly payment in the form of interest.



* Others:- There are various other arrangements for interest repayment such as fixed rate, variable rate, capped rate, discounted rate and fix & tracker mortgages arrangements. Of these, the fixed rate and discounted rate has been the most popular but nowadays the trend is shifting towards variable rates.



Another important concept related to mortgaging is remortgaging. It simply means fulfilling the liabilities of an existing mortgage with the help of a new one.

The mortgage market in the U.K. suffered due to the global financial crisis. Mortgage lending for purchases of home, saw a decline in August but it still maintains a rough 29 percent which is still ahead of last year’s statistics.

Latest data from the Council of Mortgage Lenders reveals that loans for home purchases have fallen by 5% to 52,700 in the month of August, while remortgage activity registered an even greater fall, i.e., 22% to just 32,000 loans.

CML economist Paul Samter says “House purchase activity has revived from its moribund state at the beginning of the year.” He expects “a drawn out recovery process with seasonal ups and downs.”

“Remortgaging demand has fallen away in the low interest rate environment and this is dragging down gross lending levels overall.”