What is a mortgage?
In essence, it’s a loan from a bank or building society
which is paid back over a number of years.
What types of mortgage
are there?
There are four main types of mortgage available:
- Fixed rate:
these fix your interest rate for the first two to five years,
so you can budget without worrying about interest rate rises.
- Variable rate: the
repayments vary depending on the lender’s Standard Variable
Rate (SVR), which can be higher than other types of mortgages.
- Capped rate:
this states the maximum amount you will pay even if interest
rates rise; if interest rates fall, your repayments will also
fall.
- Discounted rate: these
have a fixed rate over which the rates will be reduced, which
keeps costs lower in the early part of the mortgage.
How can I repay my
mortgage?
There are three main ways or repaying your mortgage:
Repayment mortgage
This is the most popular method where you repay your mortgage
over a set period of time. Over the term of the mortgage, you
pay off both the interest on the loan and also the capital; you
are guaranteed to pay off the mortgage if you make all your payments.
Interest-only mortgages
Here the borrower only repays the interest on the loan, which
means that the mortgage debt is never reduced. For example, if
you have a £100,000 mortgage over 25 years, at the end of
the 25 years, you will still owe the lender £100,000. With
an interest-only mortgage, you need to take out a savings scheme
that builds up a lump sum so you can pay off your mortgage at
the end of the term.
The most common schemes are endowment policies,
Individual Savings Accounts (ISAs) and personal pensions.
"New" mortgages
There have been a number of innovations in the mortgage market
over the last few years, with most of them claiming to save you
money over the term of your mortgage.
Flexible mortgages allow you to overpay each month
so that you can reduce the term of your mortgage, as well as reducing
or stopping payments. These mortgages can be a good idea if you
are self-employed and your income is erratic.
Current account mortgages combine your current account
with your mortgage, so if you have a large amount in your current
account, then that is taken into account when calculating interest
on your mortgage. For example, if you have a mortgage for £150,000,
and have an average balance of £2000 in your current account,
then you will only be charged interest on £148,000.
Offset mortgages are similar to current account
mortgages, but they also take into consideration any savings you
may have in other accounts.
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