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About Mortgages |
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What different types are there?
Although there are many different types of mortgages on the market,
generally they can be split into three basic types:
- Repayment mortgage:
Under these arrangements
you are required to pay monthly contributions, these are
made up of part capital and part interest. Payments
often remain the same across the term of the loan.
However the structure of the repayment method normally
means that during the early years of the mortgage,
little capital is repaid. The rate of repayment
accelerates over time. Repayment mortgages are normally
quite flexible as it is sometimes possible to extend the
term of the loan with the agreement of the lender. Also,
it is normally possible to increase the capital
repayment of the loan so decreasing the term.
- Interest only:
These arrangements do not
require you to make any capital repayments until the end
of the loan. The monthly payments to the lender are made
up entirely of interest. In order to clear capital, at
the end of the loan term, you must have an amount equal
to the outstanding debt. Most people achieve this by
making regular contributions to a savings plan; this
plan is targeted to accumulate an amount sufficient to
repay the debt outstanding at the end of the mortgage
term. Any such savings plan (e.g. Endowment Assurance or
ISA plan) should be kept under regular review.
- Flexible:
These are a newer style of mortgage
arrangement. They offer you the option to increase or
decrease your monthly payments, or perhaps stop them
altogether for specified periods. This flexibility is
designed to assist you to manage your cash flow. Many
flexible mortgages offer daily or monthly calculation of
interest. This system could normally be expected to
reduce the overall amount of interest you pay throughout
the loan term when compared with a more traditional type
of mortgage.
The latest addition to the mortgage range is a combined
system of current, savings and mortgage accounts. The
mortgage element will still be a repayment, interest only
or flexible loan, but the amount in your current and
savings accounts are considered when the lender calculates
the interest due. For example if you held a savings
account with a balance of £1,000 this amount effectively
reduces your outstanding mortgage by £1,000. Such
arrangements are known as offset mortgages.
You may also find a 'drawdown' mortgage, which is helpful
if you have a property that requires renovation. You
receive a basic amount, then as you complete work on your
home, further amounts become available to draw down as
required.
Further differences occur in the way interest is
calculated on your mortgage.
- Variable: the interest rate you pay rises and
falls in line with the bank base rate
- Fixed: the interest rate is fixed for a given
time at the start of your mortgage normally from 1 to 5
years although this can be longer. Note that you may
have to pay a higher interest rate when the fixed period
finishes
- Discounted: the lender gives you a discount
on its standard variable rate for a given time
- Capped: the interest rate is guaranteed not
to rise above a certain percentage, but it may also have
a 'collar', i.e. it will not fall below a certain rate.
Different lenders will offer you different incentives to
take out a mortgage with them, for example:
- Cashback: on completion of your mortgage, you
receive back in cash a payment of some or all fees: the
lender pays for your survey, or your legal fees, or will
meet the stamp duty charges
Some lenders will charge you a penalty if you redeem your
mortgage early, or want to pay off a part of it.
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Whatever Your Circumstances.....
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Your home is at risk if you do not keep up repayments on a mortgage or
other loans secured on it. Written quotations available on request
subject to status.
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