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Mortgage
Information
Mortgages are
different from other types of loans because they are for larger
amounts and are normally borrowed for a longer period (the mortgage
term), typically 25 years.
Mortgages are secured on your property, this means that, if you
don’t keep up the monthly mortgage payments, the mortgage lender
could take back or repossess your home and sell it to try to recover
the money you owe them.
Types of
mortgages:
Fixed
rates
Fixed rates give you
certainty about your payments over a specified time as the interest
rate is fixed. Most of the fixed rate deals set the interest rate
for two to five years but you can face a heavy penalty, typically
six months' interest, if you exit early. Fixed mortgages also
generally cost more than other types and you are still taking a risk
because this product takes a call on future interest rates.
Variable
rates
Variable mortgages are available in a variety of guises. They may
take the form of a base rate tracker which follows the Bank of
England's interest rate. The interest you pay might, for example, be
the base rate plus 0.8% for the length of the mortgage, the Bank of
England makes a decision each month on where to set interest rates
so your mortgage moves in line with this. A discount tracker is a
variation which may give you a rate of base rate minus 0.4% for two
years and then base rate plus 1% for the rest of the term. This is
the most cost effective type of mortgage but if you go for a
discounted product you are going to have to keep switching to new
deals to get the best value.
Capped rates
When interest rates are rising, as they are now, a capped rate may
be the solution for homebuyers seeking a security compromise. These
mortgages set a ceiling on how much you pay, but will allow the rate
to fall again after interest rates peak. One recent offering gave a
1.2% discount on the lender's standard variable rate of 6.34% so you
paid 5.14%. But the rate was capped at 5.59% so you will never pay
more than that. If interest rates drop in the next two years the
rate on this product will also fall.
Flexible mortgages
Flexible mortgages allow you to overpay or underpay and partly
redeem your mortgage without penalty, with interest charged on a
daily basis. All the products mentioned so far are available on a
flexible basis, remember that these bells and whistles add to the
cost and you end up paying for it somewhere.
Current account mortgages or Offset Mortgages
These are a version of flexible mortgages and the concept is simple:
Why have a mortgage costing 5.0% interest plus a savings account
earning 3.0% when, by offsetting savings against the outstanding
mortgage capital, you can save interest at the rate chargeable on
the mortgage for the amount by which the savings reduce the capital?
In current account mortgages this is all achieved within one account
and when savings are credited the balance falls by the amount of
savings. Interest is only charged on the current balance of the
account. With offset mortgages, mortgages and savings are separate
accounts but the savings account earns no interest, instead, the
credit value of savings is offset against the outstanding mortgage
capital and interest rate payable reduced accordingly.
Interest only or repayment Mortgages
Interest only mortgages require the buyer to find a lump sum to
cover the original sum borrowed, regular savings plans are used to
build up this lump sum. Repayment loans gradually pay back the loan
and the interest so that at the end of the mortgage term everything
is paid off. |
