by James Copper
Unfortunately in recent years mortgages have become increasingly complex and wrapped up in technical jargon. Borrowers now need to consider at least two things, the type of mortgage loan they want and how they are going to repay it. Have a look at your options below.
- Types Of Mortgages
Variable Rate Mortgage
Rates on these loans fluctuate in line with general interest rates but because they are at the lenders discretion they dont necessarily move as far, or as fast. Discounts are usually offered to new borrowers in the early years.
Tracker Mortgage
Rates on tracker loans are normally linked directly to movements in the Bank of England base rate. The link may be for a limited period rather than the life of the mortgage.
Cashback Mortgage
When these loans are granted, cash payments are given to borrowers to spend how they like. They are typically between 6 per cent and 8 per cent of the loan.
Fixed Rate Mortgage
Rates of interest on these loans are guaranteed not to change for a specified period, typically the first three to five years of the mortgage.
Capped Rate Mortgage
With this type of loan, the interest rate is guaranteed not to exceed a fixed level during the capped-rate period. The advantage is that it can go down if rates are cut.
- Repayment Methods
Repayment Mortgage
Also known as capital and interest mortgages because part of the monthly payments gradually pays off the loan while the remainder covers the interest on the amount outstanding.
Offset Mortgage
These loans are taken out in conjunction with a current account or savings account. Regular mortgage repayments are required but at the same time the cash in the other accounts helps to reduce the loan, thereby saving interest. This can help to speed up repayment of the mortgage.
Interest Only Mortgage
As its name implies, the borrower pays the interest only on the loan during the mortgage term so the capital remains outstanding. Payments may also be made into a savings scheme, such as an Individual Savings Account, to repay the capital at the end of the term. Sometimes the loan is repaid out of the sale proceeds of the property.
Endowment Mortgage
This is where an interest-only loan is combined with a life assurance with-profits policy intended to pay out a sufficient sum to clear the mortgage at the end of the term. But endowment policy payouts are not guaranteed and many are currently expected to produce shortfalls.
- What You Need To Look Out For
Arrangement Fees
Most lenders nowadays charge you for the work involved in setting up a mortgage or to reserve a loan at a particular rate. The amounts can vary considerably between lenders. Paying more doesnt always get you a better deal.
High Lending Charge
If you are borrowing more than 90 per cent of the property value, check to see whether you will be charged an extra fee. This is to protect the lender in case you fail to keep up the payments, but not all of them make this charge.
Insurance
Some lenders will offer you a lower mortgage rate if you buy their home insurance products. They will also encourage you to take out their mortgage payment protection policy. It is usually better to shop around for the cheapest insurance deal.
Early Redemption Penalties
With mortgage special offers, fixed rate deals, etc, you will normally be charged a penalty if you pay off your loan within the offer period. In particular, try to avoid those loans with redemption penalties that extend beyond the end of the offer period as you will be stuck on the lenders standard variable rate.
Initial Disclosure Documents And Key Facts Illustration
Initial disclosure documents (IDDs) spell out mortgage advisers services, such as whether they can recommend products from one company only, or are free to sell mortgages from all lenders. Key facts illustrations (KFIs) are given to borrowers when they apply for or are recommended a mortgage. These outline the mortgages cost over its term, repayments, fees and an interest rate expressed as an annual percentage rate (APR).
Annual Percentage Rate
The APR tells prospective customers the interest rate over the life of the mortgage. This factors in any initial offer rate and then the lenders standard variable rate to which the mortgage reverts, as well as the impact of fees. The APR in the key facts document does not reflect that many mortgage borrowers switch to better deals than the lenders standard variable rate (SVR) after their initial offer expires. Neither does it include the potential costs on leaving the mortgage, such as administration fees and early repayment charges.
Standard Variable Rate
Because house prices are at a record high many people (probably including yourself) are now thinking of their mortgages in the long term as well as the upfront rate. For this reason it is worth knowing what current customers are paying. It is highly unlikely that when you come to the end of your fixed or discount rate period you will be on the same SVR as current customers. But you can use the information to see how the lender compares against others in the market.
James Copper enjoys writing on all areas of personal finance. He works for Any Loans who specialise in the Adverse Credit Remortgage and Adverse Credit Loans.
