General Information
When you have chosen the right mortgage for you, whether it be a repayment mortgage where the amount you have borrowed, together with the interest is paid progressively over the term of the loan. Or Interest only mortgages where you pay only the interest on the loan during its term, and the total amount borrowed is repaid at the end of the term using some form of repayment vehicle such as an ISA, Pension or Endowment.
Once you have chosen what basis you are going to use to repay your loan you still need to choose which type of mortgage would best suit your needs, listed below are a some of the different mortgages available and how they work.
- FIXED
- CAPPED
- DISCOUNT
- VARIABLE
- CASH BACK DEALS
- INTEREST ONLY
Fixed Rate Mortgage
Fixed Rate is where there is a set interest rate for a fixed period of time, and then at the end of the term the normal variable rate is paid. An arrangement fee is usually payable when taking out this type of mortgage.
With Fixed rate there may be early repayment charges (ERC) however many providers now offer fixed-rate mortgages where there is no penalty for paying off or changing the mortgage once the fixed rate period ceases.
It should be remembered that should interest rates fall then youcould end up paying a higher rate than the standard variable rate.
A fixed rate may be chosen if you expect interest rates to rise generally, and enable you to plan your budgeting.
Capped Rate Mortgage
Capped Rates varies in line with general interest rates, but does not rise above the interest rate cap, or fall below a certain rate this is called an interest rate collar. This agreement lasts for a fixed period of time, after which the normal variable rate is paid.
Capped rates, like fixed enable you to plan your budget accordingly. An arrangement fee must be paid for a capped mortgage and severe early repayment charges will be paid during the first few years of a mortgage if you change providers.
It should be remembered that if the standard variable stays within the limits imposed by the cap and collar then you may end up with a higher rate, or more charges than you would have had, were you to invest in a variable rate mortgage.
Discounted Rate Mortgage
Discounted Rates are very convenient if money israther tight at the beginning of the mortgage, but is likely to improve in the near future. It has a lower rate of interest in the earlier years and is predominantly intended for first time buyers, who initially have a low income.
There are early repayment charges with the discounted-rate mortgage, and this penalty period extends further than the discount period, which therefore locks you into the lender's standard variable rate.
Variable Rate Mortgage
Variable Rate is the typical option chosen, where the interest that you pay depends on the general economy. The interest rates are constantly rising and falling, and therefore makes it difficult to predict what your payments will be annually. In many other countries this option is considered far too risky, due to the uncertainty of the interest rates.
Cash Back
Cash back deals. Some standard variable rate mortgages offer a cash sum when the mortgage is taken out, which can be used in any way. This is not an interest rate option, but this sum can be invested and can be profitable.
With cash back deals there is an early repayment charge in which, should you pay part or the entire mortgage, you must also pay the cash back received. It may be beneficial to combine different interest rate options and some lenders allow you to do this.
Interest Only
With Interest only mortgages the loan is not paid off during the mortgage term, but instead just the interest is paid to the lender and the original amount borrowed needs to be paid at the due date of the loan term. Generally the mortgage holder will also be paying into an investment that has the potential to build up a lump sum, which is then used to pay off the mortgage at the end of the term.
At present there are many types of interest only mortgages on offer these include the ISA mortgages (formerly PEP), Pension mortgages and the previously most common type, the endowment mortgages.
Effectively there is a gamble with investments, grown sufficiently the savings should have built up to a value to pay off the loan and may even provide a surplus over and above the loan amount. In addition you may have saved money during their mortgage term by paying out less each month than with a repayment mortgage. However, in recent years investment returns have been lower than expected and therefore you could face a shortfall when you come to pay off your mortgage, or you could have to pay more each month than with a repayment mortgage.
The risk associated to interest only mortgages depends heavily on the type of investment to which they are linked, though they do not need to be linked to an investment. Various lenders allow you to decide on how you will repay the money at the end of the term. This may be appropriate in circumstances where you have substantial investments that can be used eventually to repay the loan. Or you may receive a future inheritance that will provide you with enough money to repay the loan.
Your home may be repossessed if you do not keep up repayments on your mortgage
The FSA do not regulate some forms of mortgages
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