Understanding different mortgage types
Mortgages should be straightforward - you borrow money to buy a house and pay interest on the loan. But after a few enquiries, you soon realise that it's not so simple after all.
In a hugely competitive market, building societies and banks are continually updating and extending their range of mortgages. The list is already extensive enough to baffle all but the most determined. With over 150 UK companies offering mortgages, and with several different types to choose from, it can be confusing to find the right one!
Flexible mortgages
These repayment mortgages allow you to vary your monthly repayments. Depending on the mortgage, you can:
- Make bigger or smaller payments each month.
- Make a lump sum payment.
- Take a break from payments altogether.
You can usually do any of these without being charged a penalty fee, as long as you do not exceed a pre-agreed borrowing limit.
Variable rates - This means you pay the going rate on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point.
Fixed rates - The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit. Very low rates may tempt you, but they can be used to trap you into paying over the odds at a future date. Check how long you will have to stay with the lender before you can switch without penalty.
Capped rates - These are fixed, but if rates fall you pay the lower rate. Such deals can be a good for budgeting.
Cash back deals - This is when lenders offer money back if you take out a particular product. However, nothing comes free in life and cashback mortgages may be weighed down with hefty penalty charges if you later want to switch lender.
Discounted rates - Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.
The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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