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What are the main types of mortgages that are available?
By Richard Green
These days there are hundreds of different types of mortgages: fixed, variable, capped, discount, base rate tracker, offset, repayment only, interest only, and these can also include a variety of options such as the ability to take payment holidays, or avoiding redemption penalties, the list goes on. Choosing the best mortgage for a person's particular circumstances can be difficult, and it is essential to know what the various terms mean prior to making any final decisions on which mortgage provider to go with.
A fixed rate mortgage has a rate of interest which is charged at a set pre-determined rate for a specified period of time. This means that while the fixed rate period remains in effect, even if the banks general base rate were to significantly change, the interest rate charged on the mortgage will remain unaffected.
Variable rate mortgages have an interest rate which can be altered by the lender at any time, usually in line with the banks general rate. This means monthly payments can fluctuate, making repayments drop during periods of reducing rates, but payments may increase if rates start to rise.
Capped rate is a type of variable mortgage with an introductory period where the upper level to which the interest rate can increase is restricted. This means that the rate can decrease below this level, but not exceed it.
Discount rate mortgages are a type of variable rate mortgage where there is an introductory period during which an agreed reduction in the usual variable rate is provided.
Base rate trackers are a type of mortgage which have a variable rate, but follows the Bank of England's Base Rate plus an additional percentage agreed with the lender at the start of the mortgage period.
Offset, also called Flexible or Lifestyle Mortgages, mean that the amount borrowed is linked to a borrowers savings. This is useful because interest rates on borrowings are usually higher than those on savings. By combining both the mortgage and savings into one account through an offset mortgage, the lender will reduce the balance of the mortgage on which interest is charged, by the equivalent of the savings being held. The total amount on which high interest charges are payable is thereby reduced although you do not receive any interest on the balance of savings.
The most common form of mortgage for potential house buyers looking to purchase their home is a conventional capital repayment mortgage. With this type of mortgage the monthly repayment amount includes interest charged on the amount borrowed, along with a portion of the capital sum borrowed. Providing the correct monthly repayments are made on their due dates, then at the end the life of the mortgage agreement, this mortgage will guarantee to repay the total mortgage debt, and the borrower will fully own the property.
Often used for property speculation, interest only mortgages have become increasingly popular in recent years. These require the borrower to repay the interest due on the loan amount, without adding on the repayments to cover the additional capital sum. The borrower may then be required to makes their own arrangements for the repayment of the capital lent through the realization of separate assets or possibly the sale of the mortgaged property, prior to the final completion of the mortgage term.
Payment holidays allow the usually strict mortgage repayment schedules to be more flexible, enabling payments to be occasionally missed without penalty when budgets become tight.
Redemption penalties are an important consideration if there is a chance of the mortgage being paid off prior to the end of the term. Many mortgages will have early repayment penalties levied if the full term is not reached, especially with fixed, capped or discounted products.
To find out more information, most of the major online mortgage providers such as Barclays provide useful sources of information to help buyers make their choice over what is best for their circumstances. Mortgage comparison websites like Moneynet can often also provide impartial free information as well as essential price comparisons. It must be noted that before making any financial decisions you are strongly advised to seek out professional qualified advice from an independent financial adviser to ensure you are legally protected.
Disclaimer:
All information contained in this article, is for general information purposes only and should not be construed as advice under the Financial Services Act 1986.
Your home may be at risk if you do not keep up with the repayments.
You are strongly advised to take appropriate professional and legal advice before entering into any binding contracts.
About the Author
Richard lives in Edinburgh, occasionally writing for the personal finance blog Cashzilla, and listens to music no one else likes.
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