123 Mortgages Mortgage Guide
Types of mortgage
Before you can find the best deals, you'll need to decide what type of mortgage you want. It may seem as though there's an endless amount of choice, so we've broken it down into sections:-
There are just two main types of mortgage;
1. Repayment mortgages
2. Interest Only mortgages
It's the variations on the ways to repay the interest that can cause confusion;
a) Fixed rate
b) Standard variable rate
c) Capped rate
d) Discount rate
Repayment mortgages
Also referred to as Capital mortgages, this is the only type of mortgage that guarantees that the property will be yours at the end of the mortgage term â?" if you've repaid the loan.
Your monthly mortgage repayments are divided into capital repayments (repayment of the money you borrowed) and interest payments (repayment of the interest charged for the loan).
Interest-Only mortgages
With this type of mortgage, you only need to pay off the interest during the mortgage term. You pay off the capital debt right at the end of the mortgage term.
The assumption behind this arrangement is that you'll make simultaneous monthly repayments into an investment fund throughout your mortgage term. The theory behind this scheme is that your investment fund will grow and eventually leave you with more than enough money to pay off your capital debt.
It's essential that you're aware of the risks before deciding upon this type of mortgage; if your investment is unsuccessful, then you could lose your home. Bear in mind that if this does happen, it's likely that it'll happen at the end of your mortgage term when you're close to retirement age.
If you do decide on this type of mortgage, consult an IFA who specialises in investments before you accept any offers. And remember to shop around!
Fixed Rate mortgages
With this type of mortgage, you agree a rate of interest with your mortgage lender, which will remain the same for a set period of time. After this time, the interest rate will revert to the lender's variable rate.
If interest rates drop you may end up paying more than you would have done with a variable rate mortgage. However, interest rates may also rise.
Exit penalties are usually quite high with this type of mortgage â?" some penalties even extend beyond the fixed rate period. This is called an overhanging redemption penalty' and should always be avoided.
Variable Rate mortgages
A mortgage lender's variable interest rate is set higher than the Bank of England's standard interest rate. It's usually set at 1-2% higher. Interest rates fluctuate so opting for this type of mortgage could either pay off, or see you paying more than you'd hoped.
For example, if the standard interest rate is 4% and your mortgage lender's variable interest rate is set at 2% more, you'll be paying 6% interest. If the Bank of England raise the interest rate by 1%, the interest rate on your mortgage will rise to 7%.
Interest rates vary hugely among mortgage lenders so make sure you do your research.
Capped Rate mortgages
This type of mortgage is considered to offer all the benefits of the fixed rate and variable rate mortgages.
You'll set a maximum interest rate, which will be the limit you're willing to pay over a period of time. Yet this type of mortgage also allows your interest rate to drop if the variable interest level falls. Therefore, you can both benefit from falling interest rates, and protect yourself if they rise.
However, the interest rate you'll be paying is likely to be higher than with a fixed or discounted rate mortgage. Also, prepare to pay the lender a fairly steep admin charge for this type of mortgage.
Discount Rate mortgages
Most lenders offer new customers a discount on the standard variable rate they offer. The discounted rate will be valid for a set period and will fluctuate in the same manner as standard variable rates. After the agreed set period, the interest rate will revert back to the lender's standard variable rate.
Before you sign up for one of these deals, it's worth checking the mortgage lender's variable rate charges because you may eventually end up paying more than you expected.
Bear in mind that while you will be paying less, if standard interest rates rise, you'll be locked in the agreement for a set period of time. However, you can simply change to another discount rate deal as soon as the period is up but do check that there are no exit penalties first.
Mortgage Basics - basics regarding interest rate, exit penalities, proving income
Property valuation & survey fees - property valuations and expenses incurred buying a home
Getting a Mortgage - different ways you can go about arranging a mortgage
Mortgage Types - explanation of the different types of mortgage available
Mortgages for people with bad credit - info for people who have credit problems
Bad Credit Mortgage - more info on mortgages for bad credit
Remortgaging - information on switching your mortgage to another provider
Mortgage Calculator - basic mortgage repayment calculator
Useful contact information - useful contact information relating to mortgages
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP PAYMENTS ON YOUR MORTGAGE.