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