Mortgages: what products are available?

Basic principle of a mortgage is very simple: you borrow money to buy a house and pay back the loan with interest. However, nowadays there are so many products available that it can be mind-boggling. Here’s a guide to methods of repayment and interest rates.

Methods of repayment

Repayment mortgage: with repayment mortgages, also known as capital and interest loans, you repay a little of the capital with every repayment, along with interest, gradually paying more and more until the loan is paid off at the end of the term.

Interest-only mortgage: you don’t pay any of the capital in your monthly repayments with this type of mortgage. Instead, all your repayments are towards the interest only. You’ll need to set up a separate savings or investment fund, e.g. and endowment policy, for repaying the capital as a lump sum at the end of the mortgage term. If the fund doesn’t accumulate enough capital to repay the mortgage at the end of the term, you will need to pay the shortfall.

Interest rates

Standard variable rate: the rate of interest that you pay fluctuates depending on the lender’s current rate, which is normally linked to the base rate set by the Bank of England. So if interest rates are high, your mortgage repayments will increase. Conversely, if they are low, your repayments will be lower. Normally there aren’t any charges for repaying lump sums without penalty.

Tracker: tracker rates are another type of variable rate loan where the lender ‘tracks’ the rate at a set amount above or below the Bank of England base rate and it increases or decreases in line with base rate changes.

Fixed rates: the interest is set at one rate for a specified period of time, normally before changing to the lender’s standard variable rate. This can be good for helping you to budget in the first few years of your mortgage, or if you think interest rates are likely to fall during the fixed rate period, but you could end up paying over the odds if the base rate is low during this period. Some fixed rate products charge penalties for leaving so check exactly what the terms and conditions are before you sign up.

Capped rates: these are variable but specify a maximum level (‘cap’ or ‘ceiling’) that you’ll pay, so you will pay less if the base rate is lower than this. Normally the capped rate applies only for a fixed period, after which you’ll move to the lender’s standard variable rate. In this way you can benefit from reduced repayments if interest rates are low, with the security that they can’t go above a certain level. It can be useful for helping you to budget in the first few years of your mortgage.

Collared rates: the opposite of capped rates – they are variable but won’t go below a certain level (‘collar’ or ‘floor’). Collared rates are normally used along with a capped rate or tracker. If rates are lower than the collar, you could lose out.

Discount rates: some lenders give discounts from their standard variable rate for a fixed period as a special offer. You should check that you’ll be able to afford to repay the increased rate at the end of the fixed discount period.

Standard variable rate with cashbac: you’ll receive a sum of money when you take out the loan, which can be good if you don’t have any cash to spare for furniture, décor or home improvements. If interest rates don’t rise too high, it may be a good deal, but if they do you could be paying back a great deal more.

Important points to bear in mind

Your home is provided as the lender’s security for the loan, so if you’re not able to keep up repayments you may have your home repossessed.

Before you sign up to any deal, always check the terms and conditions of the mortgage. Check whether there are any penalties for leaving or paying off early, or whether you can contribute lump sums if you wish. Also check for other hidden charges and ask what will happen in the event that you are unable to repay.

Biography:
Author:Benedict Rohan
Website: http://www.mortgagenation.co.uk
Benedict Rohan works as a freelance finance writer. Commercial Mortgage, Homeowner Loans,Remortgages