Methods of Repaying a Mortgage
Types of Mortgage
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A mortgage is a loan secured by the lender on your property. If you do not keep up repayments your home can be repossessed.
Tracker Rate Mortgage
A tracker rate mortgage is always a set percentage above the Bank of England’s base rate, which is currently 0.5%, for a specific time, which is usually 2 or 3 years. This means your interest rate will only move if the Bank of England rate increases, not if the lender decides to increase the rates.
Capped Rate Mortgage
A capped rate mortgage is where the lender has set an upper limit that the interest rate cannot go above in effect a ceiling. This ensures that you know your rate will not go above the Capped Rate regardless of Economic conditions.
Discount Rate Mortgages
As the title indicates, these are rates offered by lenders which are normally a discount of their standard variable rate designed to attract borrowers and can be competitive.
Offset or Flexible mortgages
These are designed with a certain type or client in mind and will not suit everyone. They are usually arranged on a repayment basis and work most efficiently for people who have excess funds . The objective is that the excess funds, are placed in a linked account which offsets against the interest paid on the mortgage. The lender then calculates the interest on a daily basis on the overall balance in the account and not just the mortgage balance. This reduces the overall amount of interest payable. The net effect is that while you are not physically receiving interest on your savings, you are being given the equivalent of the mortgage rate while it offsets. There are also no penalties for overpayments.
Standard Variable Mortgage
This is the basic type of mortgage where the lender sets the interest rate according to the current financial market conditions. Most fixed, discount and other mortgage types eventually revert to a variable rate once any fixed or discount period has elapsed. Very few people now choose this option at the outset of the mortgage as the discount / fixed rate offers provided by lenders usually provide far more attractive terms.
Is a way of combining a house purchase with an investment and including a life assurance. Interest only repayments are made to the lender with a premium payable to a life assurance company. The debt never reduces but it is repaid at the end of the mortgage term by the maturing endowment policy. The final maturity amount does not guarantee to repay the outstanding amount and can be more or less than the mortgage debt.
Is a way of combining a house purchase with an investment but life assurance is not automatically included and needs to be arranged separately. There is the flexibility to increase or decrease regular contributions and contribute additional lump sums or take withdrawals. The final maturity amount is not guaranteed and may be more or less than the mortgage debt.
Capital & Interest Repayment Mortgage
The traditional way of repaying a mortgage. Repayments consist of both capital and interest with the debt reducing to zero over the term of the mortgage. A separate Life Assurance is advised to protect the mortgage debt.
Fixed Rate Mortgage
A fixed rate mortgage means for the duration of the agreed time limit which can be anywhere between 1 and 5 years, you will pay exactly the same amount of interest. Often these rates are marginally higher than other types such as Tracker or Discounted loans. They offer the security of knowing that if interest rates go up, your repayments will remain the same. However this can be counterproductive if the rates decrease. When your term ends your payments will revert back to the lenders Standard Variable rate which may be higher than the one you have come off, resulting in an increase to your monthly payment.
Your home may be repossessed if you do not keep up repayments on your mortgage