Mortgage Information
This page provides information about typical mortgage types and repayment methods.
Mortgage Types
Fixed Rate Mortgage
This type of mortgage has the interest rate fixed for a specified period of time, usually one to five years, which means that you have the security of knowing that your monthly repayments will not change during that time. One point to bear in mind is that, should interest rates fall during the period of your fixed rate deal, you will have to continue paying the same agreed amount.
Discount Mortgage
A discount mortgage gives the borrower a rate of interest at a set level below the lender’s standard variable interest rate for a specified period of time, usually between 6 months and five years. The monthly amount you pay will change if the standard rate changes but will always be a set percentage below this rate for the term of the discounted rate.
Tracker Mortgage
A tracker mortgage will “track” the Bank of England base rate at a set percentage above this rate for a fixed period of time. If the base rate should go up or down, then your monthly repayment will change accordingly, but will always be at the agreed level above base rate.
Capped Mortgage
A capped mortgage benefits from an agreed interest rate for a specified period, but if the lender’s standard variable rate drops below the capped rate, you will make your repayments at the lower rate. If interest rates should rise, then you are protected against having to pay the higher rate, because your mortgage rate has been limited or “capped”.
Flexible Mortgage
A flexible mortgage can offer you the advantages of a daily interest rate instead of annual, which means that any overpayments you make can save you interest. If you have made overpayments, you can take “payment holidays” during times of lower seasonal income, for example, or periods of financial hardship. There are normally no tie-in penalties with this type of mortgage.
Offset Mortgage
With an offset mortgage your savings and borrowings are linked together or “offset” against each other. This may mean that you pay less interest on your mortgage, helping you to repay your mortgage more quickly and, therefore, more cheaply.
Variable Rate Mortgage
This mortgage is offered at the lender’s standard variable
rate and imposes no early repayment penalties for withdrawal at any
time. You must remember that, if interest rates rise, then your monthly
repayments will go up. It may be more difficult for you to predict
your monthly costs of borrowing and therefore to budget appropriately.
Repayment Methods
Repayment
With this method your monthly repayments include an element of capital each month as well as interest. In the early years you will find that a greater proportion of the monthly repayment will be interest rather than capital, but in the later years, as more capital is paid off, the proportion of interest decreases. Provided you keep up with the monthly repayments, you are guaranteed to have paid off the loan by the end of the mortgage term.
Interest-only
With an interest-only mortgage, you do not repay any of the capital until the end of the mortgage term. Your monthly repayments will consist only of the amount of interest due. At the end of the mortgage term you will still owe the original amount borrowed, and it will be your responsibility to ensure you have the means to repay this capital sum.
There are various types of investment schemes, which can be used to cover an interest-only loan:
Endowment
With an endowment mortgage you pay interest on the loan to the lender each month and a monthly premium into an investment plan, which usually includes life cover. The endowment plan is designed to pay off the capital at the end of the mortgage term or if you die beforehand.
ISA
With an ISA mortgage you pay interest on the loan to the lender each month and invest in an individual savings account, which has tax-free advantages and is designed to pay off the mortgage at the end of the term. ISAs can be invested in the stock market, life insurance and cash.
Pension
A pension mortgage is available to the self-employed and those contributing to a personal pension plan, but not to those in company schemes. With a pension mortgage the capital sum remains outstanding for the length of the mortgage term and is met from the pension plan. The advantage of this method is that you can claim tax relief on any contributions made to the pension plan.
REMEMBER, IF YOU CANNOT MAKE REPAYMENTS ON YOUR MORTGAGE OR PAY
BACK THE MONEY YOU OWE, THERE IS A RISK YOU COULD LOSE YOUR HOME.
