Mortgage Types


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Interest Only

Means that your monthly payments are just clearing the interest, you are not actually clearing any of initial amount borrowed.
Interest only is worth consideration if you want to keep your repayments low, but you must be aware that you are not actually reducing your initial loan amount and so at the end of the term you will not own the house, it will still belong to the mortgage company.
You will need to consider how you will then clear the loan? You may have set up a savings account, taken an endowment policy or have decided that at the end of the term you will actually sell the house. Being as, as a general rule house prices increase, (expect for in times of recession) you could sell the house and pay off the original loan. Hopefully this would still leave enough to purchase outright a smaller home, or you could choose to rent a property and have a good nest egg toward your retirement.

Offset

Means that if you have savings for example £30,000 and you apply for a mortgage of £100,000 then you will only pay interest on the £70,000. You can also link credit cards and current accounts to your offset mortgage to reduce the amount of interest you pay overall.

Flexible

Means that you are able to overpay, underpay, take payment holidays and take back payments which you have already made. The idea is that you will have much more flexibility on your mortgage and as soon as you make a payment your interest will be reduced in line with the lower loan value.

Fixed Rate

With a fixed rate you know from the start what your interest and payments will be, you can also choose the term for which you want your fixed rate, this is often 2yrs, 3yrs or 5yrs after which you can choose to move to another fixed rate or go onto the mortgage companies standard variable rate.

Capped Rates

Are a variable rate, but there is a maximum amount which your payments can not exceed. Often with capped rate mortgages there is also what is called a collar and this is basically the opposite of a cap, meaning that there is also a minimum which your payments may not fall below. So if the base rate drops dramatically you may lose out, but if it rises dramatically you should be better off.

Tracker Rates

Are often linked to the Bank of England base rate and so the interest and monthly payments will go up or down in line with the base rate.

Standard Variable

Variable rates mortgages mean that the interest and monthly payments go up or down along with the mortgage providers interest rate, the mortgage providers interest rate is often calculated from the Bank of England base rate.

Discount Rate

A discount rate will usually mean that to begin with you will pay a lower amount on your mortgage for a set time, but then after this your interest rate and monthly payments will increase, this is often to the mortgage providers standard variable rate.

It all depends on what you want from your mortgage, it may be that you like to know where you are up to each month, in which case a Fixed Mortgage may be the best choice for you.
Or it may be that you want your payments as low as possible, meaning an Interest Only Mortgage may be best, but if you do choose this option remember that you must plan how you intend to pay off your mortgage at the end of the term as the original amount you borrowed will still be outstanding. Some people set up an Endowment, others savings and some people simply sell the property to pay off the balance, however in this option you must account for what you intend to live next and if the property value will be high enough to clear the outstanding interest?

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Updated on 21st April, 2009

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