We have compiled this quick guide for our clients and followers who are looking into raising a mortgage for either a first or second home. Some of our clients are also thinking about changing their mortgage type, as pressure is put on the Bank of England to increase interest rates this year.
Repaying your mortgage
There are basically two alternatives: Repayment (or capital and interest), and interest only
Repayment mortgage
With a Repayment mortgage you pay part interest and part capital repayments to the lender each month and in this way the capital debt outstanding is reduced until the loan is repaid.
An Interest-only mortgage
With an interest only mortgage, you make no capital repayments until the end of the term. Instead payments may be made into an investment designed to repay the loan at the end of the mortgage term. with this type of mortgage there is a risk that the value of the investment may not be enough to repay the debt. The most common forms of investment used are endowments. ISAs or certain types of pensions. During the mortgage term you pay only the interest to the lender on the outstanding balance.
Combination
Some lenders are able to offer a combination of the above which may be more suited to your individual circumstances.
Interest rates
In addition to the standard variable interest rate., there are many different schemes available. fixed, Discount, capped and collar, Flexible or even a combination of some of the above.
Standard variable rate
With this type of mortgage your payments will go up or down when the lender’s mortgage rate changes. Most standard variable rates tend to move in line with the bank of England base rate but there is sometimes a delay and there is no guarantee that the lender will pass on the full effect of the increase rates come down.
A “tracker”
This is a varible rate where the intersrt rate is set amount above or below the Bank of England or some other base and so always “tracks” charges in that rate. Some people are considering changing their existing tracker mortgages, as rates are predicted to increase this year.
Fixed rate
The rate is fixed for specified number of years, so you know what your payments will be over that period. following this period, the rate will usually revert to the lender’s standard variable rate.
Discounted rate
A discounted rate gives you a reduction of, for example 1% off the varible rate for a specified period. So although the rate may rise and fall you will be be paying less than the variable rate for this period.
Capped rate
Your payments are variable, but they are guaranteed not to rise above a set level (the “cap”) during a specified period. These schemes may sometimes include a “collar” or minimum rate level which is the level the rate will not fall below. Following this period, the rate will usually revert to the lender’s standard variable rate.
Flexible mortgages
These are various benefits which usually include the ability to vay monthly payments in line with your changing circumstances, They may also allow you to take payment holidays and to borrow back any overpayment you have made. Because of their flexible nature and the variety of schemes available it is not possible to give a full description here, but your mortgage advisor will provide more detail if you are intersted in this type of loan.
Current account mortgage
This is a flexible mortgage linked to your current account. some companies in this sector also link savings accounts, credit cards, mortgages and personal loans together into combined accounts. With this type of mortgage, you are only charged interest on the net account you owe the lender, after netting off savings or current account balances againsy the amount of you mortgage.
Cashback
Some loans o offer a lump sum which is paid out following completion, with a mortgage charged at the lenders variable basic rate. Smaller cash backs may be offered with reduced rates and other incentives as a combination package. These type of mortgages will typically have early redemption charges which would apply if you redeemed within a specified period after completion.
Buy to let mortgages
A buy to let mortgage enables you to buy a property with the purpose of renting it out. A deposit of at least 15% of the property’s value may be required.
What is APR?
All lenders have to quote an Annual Percentage rate (APR) in addition to their standard interest rate. this is to help you compare different schemes. The APR can be confusing but, as the calculation of APR takes into account other costs such as the arrangement fee and indemnity premium, it gives a more accurate indication of which mortgage is likely to be most expensive. Although the principle is the same, different lenders use varying assumptions for their calculations.
A mortgage is a loan secured against your home. Understanding the many different mortgages can be a confusing business unless you take professional advice. If you would like some more information on our mortgage products, then give our team a call today on 0845 073 6628.
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