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| Mortgage Guide |
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| This basic mortgage guide has been prepared as an introduction to the types of mortgage available. In addition to the traditional High Street lenders, many organisations now offer mortgage products. And with your home probably being your biggest purchase in life, it really is best to shop around to make sure you get the best deal to suit you and your circumstances. |
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There are basically two types of mortgage, Repayment or Interest Only.
Repayment
With a repayment mortgage, you make monthly payments which cover both the interest the lender charges you and a portion of the amount (capital) borrowed. This is designed so that at the end of the mortgage term, the loan should be repaid in full.
Interest Only
An Interest Only mortgage should be supported by some type of investment product, for example a pension plan or endowment policy. The monthly mortgage payments only cover the interest being charged by the lender and at the end of the term, the original amount borrowed will need to be repaid, usually from the proceeds of the investment product. Because of the nature of investment products you cannot guarantee their worth at the end of the term and seeking professional independent advice is advisable.
Mortgage Products
There are many types of mortgage product available today which can usually be applied to both repayment and interest only mortgages. It is well worth visiting several providers before deciding which one best suits your circumstances. Although there is a wide range to choose from, they will fall into a few basic categories:
Standard Variable Rate
The interest is charged at the lender's standard variable interest rate (SVR) and will fluctuate as and when the lender decides to alter their SVR. There are rarely any restrictions or penalties applied to this type of product although you should check with each lender.
Fixed Rate
The interest rate charged is fixed for a set period of time. The benefits of this product are that you can budget because you know exactly how much you will be paying for the term of the fixed rate product and the rates are generally lower than the lender's SVR. However, there is always the possibility that the SVR is reduced below your fixed rate during the product term, in which case you may be paying more. There are very often restrictions in making capital repayments (making 'lump sum' payments to the mortgage to reduce the balance) and penalty payments to make if you close the account early.
Capped Rate
The interest rate remains the same as the lender's SVR until that SVR rises above a specified rate (the Capped Rate). For example if the Capped Rate was 8% and the SVR was 7.5%, you would pay the SVR. If during your Capped Rate period the SVR rose to 8.1% you would pay the Capped Rate of 8%. Again there are very often restrictions and penalties applicable.
Flexible Mortgages
Dressed in varying guises, these products allow you to be more flexible in your payment arrangements, for example building up a payment credit and then using that to cover a payment "holiday". The interest is often calculated on a daily or monthly basis (as opposed to more traditional accounts where this is worked out at the end of each year) which means that each payment you make reduces the balance on which interest is charged, so saving money or reducing the term of the mortgage. They generally have a good rate of interest and you would probably need to meet certain criteria to be eligible.
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