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Debt Advice Handbook Scotland 1st ed - with new material

Common mortgage types

• Capital repayment mortgages
• Interest-only mortgage
• Standard variable rate mortgages
• Fixed-rate mortgages
• Tracker mortgages
• Shared ownership mortgages
• Islamic mortgages

Mortgages can have different payment options which affect how much is paid and when it will be paid. Regulated financial advice should be taken by the client.

Capital repayment mortgages

Repayments for capital repayment mortgages go towards the amount borrowed (the capital) and the interest. Payments may vary each month depending on the rate of interest. See standard variable rate on here and fixed-rate mortgages on here. Therefore, the whole loan should be paid off by the end of the mortgage period. This is the most common type of mortgage.

Interest-only mortgages

Interest-only mortgage repayments only pay off the interest. Payments may vary each month depending on the interest rate.

The capital is due to be paid off at the end of the mortgage period in a lump sum. This lump sum payment is normally paid from savings, pensions or an insurance policy taken out at the same time as the mortgage, such as an ISA or endowment policy.

The Financial Conduct Authority (FCA) is worried that there are many people with interest-only mortgages that are coming to the end of the loan term without them having the means to pay the capital part of the loan off. See here on the FCA guidance for more information.

Standard variable rate mortgages

This could be a capital repayment or interest-only mortgage.

Repayments towards standard variable rate mortgages may vary from month to month.

If the lender increases its standard variable rate, monthly payments increase in capital repayment and fixed-rate mortgages.

Fixed-rate mortgages

Fixed-rate mortgages have a fixed interest rate for the entire mortgage or for a set period – eg, five years. The interest rate is set at the start of the term and does not change. This avoids variable payments and are popular for people who want to know how much they will pay each month.

Tracker mortgages

A tracker mortgage is a form of variable rate mortgage which tracks or follows a base rate (usually the Bank of England’s base rate). The amount repaid can change each month. A tracker mortgage’s payments may go up, but may also be reduced if the base rate goes down.

Shared ownership mortgages

Shared ownership schemes help people who cannot buy a home on their own. They buy a share in a home, usually a new-build development, at 25, 50 or 75 per cent. The rest of the property is owned by a housing association or the builder. The buyer pays a reduced rent (known as an ‘occupancy payment’) for the part of the home they do not own. The total cost of the reduced rent and mortgage repayments may be less than the cost of a 100 per cent mortgage.

Remember to count both the loan and the rental amount.

Islamic mortgages

There are three types of Sharia-compliant mortgages. Specialist advice should be sought.

•Ijara: repayments for this plan cover payments towards capital and rent payments. The buyer will have bought out the plan provider by the end of the term and they become the sole owner.
•Murabaha: the lender buys the property and sells it to the buyer at a slightly higher price. The price depends on the property’s value, the deposit paid, and the length of the mortgage. The deposit is at least 20 per cent of the purchase price. Repayments are fixed and the loan can be repaid at any time.
•Diminishing Musharaka: is a co-ownership agreement. The buyer and the bank own the property together. The buyer buys the bank’s shares in the property over time, gradually increasing their stake in the property.