Types of mortgage
The type of mortgage and the lender you choose can have long reaching consequences to your financial situation. Making the wrong decision can be very costly. Although the mortgage market is smaller than a few years ago, there is still an enormous and sometimes bewildering choice of options. The market changes daily with deals appearing and disappearing at the will of the lenders.
It is vital that you make the right choice and we can help guide you through this.
Capital repayment
As the name suggests, each payment you make repays some capital and some interest. The great advantage of this method is that your mortgage is reducing as time goes on and, provided you maintain your repayments, the mortgage is guaranteed to be repaid by the end of the term. Without doubt this is our preferred option.
Interest only
This means that you do not repay any of the capital and hence the whole amount remains outstanding until repaid by another method. You must therefore ensure that you have a way of repaying the whole of the capital by the end of the term.
Both of the above types involve repayment of interest at a rate set by the lender. The way the interest is repaid varies, with a few examples below. There are as many variations on these themes as there are lenders and the choice you make here can have a large impact on your long term commitment.
Variable Rate
This represents the lender’s Standard Variable Rate with no tie ins. This is usually the rate to be avoided as it is usually the most expensive option. With rates at almost nil there are more people on this rate than for a long time, although some lenders have been increasing these rates with no link to changes in Base Rate.
Discounted rate
Under this type of arrangement the borrower is offered a discount off the lender's Standard Variable Rate for a period of time. The rate paid will fluctuate in line with changes in the variable rate.
Tracker rate
This is similar to the discounted rate but this is usually linked to the Bank of England Base Rate instead of the lender’s Standard Variable Rate. This can be for a short period of time or even the life of the mortgage. Rates and payments will change quickly and repayments will fluctuate.
Fixed Rate
Your interest rate is fixed for a set term - usually between 2 and 5 years. This option is for those people that wish to budget their costs as the repayments will stay the same for the term.
Offset mortgage
With an offset mortgage, a current account or savings account (or both) are linked to your mortgage. For example if you have a mortgage of £100k and savings of £20k the lender will only charge interest on £80k. The monthly payments are based on the original £100k, meaning that your mortgage is repaid more quickly and can save a considerable amount of interest over the term.
Some terms and conditions may apply to any of the above, such as early repayment charges.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There will be a fee for mortgage advice. The precise amount will depend
upon your circumstances, but we estimate that it will be £500.
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Registered office: DTE House, Hollins Mount, Bury BL9 8AT Company number 01967512 (England)