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Generally speaking there are two types of mortgage, a
repayment mortgage and an interest only mortgage.
Some
mortgages allow you to make overpayments, take payment
holidays or to offset interest on savings to help reduce
the amount you owe. |
With a
repayment mortgage a loan is taken out over a number
years and at the end of the term the mortgage is repaid
in full. Monthly payments are calculated using the
specified rate of interest, the loan amount and the
term. These monthly repayments consist of both interest
charges and capital repayments.
As with a
repayment mortgage, an interest only mortgage is taken
out over a specified term, usually a number of years.
Monthly payments consist of interest charges only and no
capital repayment is made.
At the end of the mortgage
term the original mortgage amount needs to be repaid in
full so it is important that a suitable savings plan or
assets have been accumulated to meet the mortgage
repayment.
Historically an Endowment policy was a
popular way to repay a mortgage, although in recent
times there have been many problems with endowment
shortfalls.
Both
repayment and interest only mortgages can be offered
with many different interest rate options. Some mortgage
products offer flexibility with features to allow
overpayments and the ability to offset interest on
savings to reduce the mortgage balance.
Fixed rate mortgage.
As a borrower you are offered a fixed rate of interest
for a fixed term. The rate is guaranteed and remains
unaltered despite changes in overall interest rates. It
can work to the borrower’s advantage and disadvantage.
The length of the fixed rate is agreed at outset between
the lender and the borrower and could be anything
between a few months and a few years.
Tracker & variable rate mortgage.
The rate of interest required by the lender will vary
from time to time in line with overall interest rates.
This can be to your advantage if interest rates fall and
conversely if they rise. Many lenders modify the
payments on an annual basis.
Capped and collared mortgages.
The borrower is charged the current interest rate, say
7%, but is given a guarantee that the rate will never
rise above, say 10% - a cap.
Conversely the interest rate paid by the borrower will
not be allowed to fall below 6.5% (the collar) even if
overall rates fall beneath this.
Discounted mortgages.
Lenders offer a discounted rate of interest for a short
period usually a maximum of 12 months e.g. 3.75%
discount for 12 months.
The discounted rate is usually only offered to first
time buyers. At the end of the discounted period the
rate of interest reverts to the current variable rate
being charged to borrowers.
Offset mortgages.
Offset mortgages offer a degree of flexibility when
compared to some other types of mortgage and are
particularly suited to people who have significant
savings or can maintain a large bank balance. Such
individuals may be self employed receiving sporadic
payments and drawing income when necessary, or directors
of companies receiving income through dividends.
mortgages offset >>
When
taking out a mortgage it is important to consider any
conditions related to the early repayment or redemption
in case you want to switch lenders. Some mortgage
lenders offer attractive initial rates but have extended
tie in periods where the rate reverts to their standard
variable for a period.
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