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What is a mortgage?
Money borrowed from a bank or building society can be called a Mortgage. Over a fixed period of time the money is paid back with accrued interest. Mortgages come in many different types to suit the best needs of the individual.
Repayment Mortgages
A repayment mortgage is when your monthly payment consist of repaying the amount borrowed together with the accrued interest. The main advantage of a repayment mortgage is that you are safe in the knowledge, that at the end of the term, you have fully repaid the total amount of the debt.
Interest Only Mortgages
An Interest only mortgage is when your monthly payment only includes the interest accrued. At the same time the borrower takes out the mortgage, the borrower chooses a 'repayment vehicle' (method of paying off the mortgage) such as an ISA, pension plan or endowment policy. There is however a problem with an interest only mortgage as the borrower only pays off the interest accrued. It is important that the payments are maintained into the repayment vehicle or it may not be possible to pay off the mortgage at the end of the term.
Endowment Policies
This repayment vehicle is the most commonly used and provides life assurance cover and a fixed payment for investment. The payments are designed so that at full maturity, the amount of the loan along with the mortgage term, the amount invested along with the amount earnt are enough to pay off the mortgage. Unfortunately there is no guarantee that when the policy matures the balance will be enough to repay the mortgage.
ISA
The ISA or Individual Savings Account is a tax free method of saving. Although ISA's are growing in popularity, they can be quite complex and would only be advised for financially sophisticated borrowers.
Pension Plan
Monthly payments are made into a pension fund. The mortgage is repaid using tax-free cash from the remainder of the fund, when benefits are finally taken.
Mortgage Interest Rates
When choosing the right mortgage it is important to consider the 4 main mortgage rate options available to you.
Fixed Rate
Each monthly payment is at a fixed interest rate for a certain period of time, regardless of any change of interest rate in the market. Most lenders will offer the rate from between 2 to 5 years, although some lenders can extend or decrease this time. At the end of the fixed rate period, the rate will usually be converted to the Standard Variable Rate (SVR).
Variable Rate
The interest rate at which payments are made, are based on the Standard Variable Rate that increases or decreases within the market place.
Capped rate
This is very similar to a fixed rate except that if the variable rate drops below the capped rate, the payments that the borrower will make are based on the lower variable rate. A Capped rate has the advantage that if the interest rates increase the payments will be capped and not raise over the capped rate.
Discounted Rate Mortgages
A discounted rate is when the lender offers a Standard Variable Rate (SVR) with a discount for a set period of time. For example if the variable rate was 6% with a discount of 1.8% the initial pay rate would be 4.2%. If the variable rate rose to 7% then the rate payable by the borrower would raise to 5.2%. This has its problems because if rates raise it can be hard to budget the monthly payments. However if rates drop the borrower will benefit from lower payments.
Flexible Mortgages
A flexible mortgage allows the borrower to make extra repayments when they have the extra money and even reduce or skip payments should the need arise. Borrowers will usually have to build up a reserve through overpayments before being allowed to lower or miss payments. The benefit with a flexible mortgage is that many lenders offer rates that are calculated on a Daily or Monthly Interest Calculations basis. Until the availability of flexible mortgages most lenders were charging interest based on an annual basis. The advantage to this type of mortgage is that even by overpaying the mortgage by a small amount on a regular basis, it can reduce your mortgage term by years.
Current Account Mortgages
This is simply a flexible mortgage linked to a current account. This type of mortgage takes the benefits of a flexible mortgage and use the funds held in the current account to offset the interest e.g. If a borrower has a mortgage balance of £30,000 and has £3,000 held in the current account, the customer will be charged interest on £27,000. i.e. The mortgage balance minus the positive balance in the current account. It is also possible to link the mortgage to savings accounts and personal loans.
Buy to Let Mortgages
Buying property to let is becoming a growing trend. Social attitudes changes have meant that many young people are renting not buying. Buy to Let is a joint initiative between Letting Agents and Mortgage lenders. The scheme is designed to help private individuals invest in property to let without being penalised by mortgage surcharges or paying commercial rates of interest.
Right to Buy Mortgage
Having the right to buy means that you can buy your home from a local authority or non-charitable housing association. This method of buying is usually cheaper because as a tenant you can obtain a discount.
Equity Release Mortgage
If you are looking to release what money may be in your property, without having to pay more mortgage payments or remove this maybe the mortgage for you. Generally, this type of mortgage is only available to those over retirement age, and often the mortgage lender will not ask for any repayment. The downside to this type of mortgage is that after you die, the lender will own the property. |
