Basic principle of a mortgage is very simple: you borrow money to buy a
house and pay back the loan with interest. However, nowadays there are
so many products available that it can be mind-boggling. Here’s a guide
to methods of repayment and interest rates.
Methods of repayment
Repayment mortgage: with repayment mortgages, also
known as capital and interest loans, you repay a little of the capital
with every repayment, along with interest, gradually paying more and
more until the loan is paid off at the end of the term.
Interest-only mortgage: you don’t pay any of the capital in your
monthly repayments with this type of mortgage. Instead, all
your repayments are towards the interest only. You’ll need to set up a
separate savings or investment fund, e.g. and endowment policy, for
repaying the capital as a lump sum at the end of the mortgage term. If
the fund doesn’t accumulate enough capital to repay the mortgage at the
end of the term, you will need to pay the shortfall.
Interest rates
Standard variable rate: the rate of interest that you pay
fluctuates depending on the lender’s current rate, which is normally
linked to the base rate set by the Bank of England. So if interest
rates are high, your mortgage repayments will increase. Conversely, if
they are low, your repayments will be lower. Normally there aren’t any
charges for repaying lump sums without penalty.
Tracker: tracker rates are another type of variable rate loan
where the lender ‘tracks’ the rate at a set amount above or below the
Bank of England base rate and it increases or decreases in line with
base rate changes.
Fixed rates: the interest is set at one rate for a specified
period of time, normally before changing to the lender’s standard
variable rate. This can be good for helping you to budget in the first
few years of your mortgage, or if you think interest rates are likely
to fall during the fixed rate period, but you could end up paying over
the odds if the base rate is low during this period. Some fixed rate
products charge penalties for leaving so check exactly what the terms
and conditions are before you sign up.
Capped rates: these are variable but specify a maximum level
(‘cap’ or ‘ceiling’) that you’ll pay, so you will pay less if the base
rate is lower than this. Normally the capped rate applies only for a
fixed period, after which you’ll move to the lender’s standard variable
rate. In this way you can benefit from reduced repayments if interest
rates are low, with the security that they can’t go above a certain
level. It can be useful for helping you to budget in the first few
years of your mortgage.
Collared rates: the opposite of capped rates – they are variable
but won’t go below a certain level (‘collar’ or ‘floor’). Collared
rates are normally used along with a capped rate or tracker. If rates
are lower than the collar, you could lose out.
Discount rates: some lenders give discounts from their standard
variable rate for a fixed period as a special offer. You should check
that you’ll be able to afford to repay the increased rate at the end of
the fixed discount period.
Standard variable rate with cashbac: you’ll receive a sum of
money when you take out the loan, which can be good if you don’t have
any cash to spare for furniture, décor or home improvements. If
interest rates don’t rise too high, it may be a good deal, but if they
do you could be paying back a great deal more.
Important points to bear in mind
Your home is provided as the lender’s security for the loan, so if you’re not able to keep
up repayments you may have your home repossessed.
Before you sign up to any deal, always check the terms and conditions
of the mortgage. Check whether there are any penalties for leaving or
paying off early, or whether you can contribute lump sums if you wish.
Also check for other hidden charges and ask what will happen in the
event that you are unable to repay.
Biography:
Author: Benedict Rohan
Website: http://www.mortgagenation.co.uk
Benedict Rohan works as a freelance finance writer. Commercial Mortgage, Homeowner Loans, Remortgages
Basic principle of a mortgage is very simple: you borrow money to buy a house and pay back the loan with interest. However, nowadays there are so many products available that it can be mind-boggling. Here’s a guide to methods of repayment and interest rates.
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