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What is a mortgage?
A
mortgage is a long-term loan, usually secured on your home.
'Secured' means that, if you don't keep up the loan repayments,
the lender can repossess your home and sell it to get its money
back.
Remember: If you can't keep up your mortgage payments, you could
lose your home. Don't overstretch your budget!
What sorts of mortgages
are available?
Mortgages differ in the methods of repayment, the interest you
pay and other features such as flexibility and cash incentives.
There are two basic ways to repay your mortgage - a repayment
mortgage or an interest-only mortgage - and several different
types of interest rates: fixed, discounted, capped, tracker or
variable. The table below sets out the main types of interest
rates and how they work.
|
Interest rate
deal |
How it works |
Penalties
|
Is it for you? |
|
|
|
During the
special deal period |
For some time
after the end of the special deal |
Some pros and
cons to think about |
|
Variable rate |
Your payments go
up and down as the mortgage rate changes (mortgage
interest rates tend to move in line with the base rate
set by the Bank of England, but there is sometimes a
delay). |
N/A |
N/A |
Yes, if you can
afford to pay more if the mortgage interest rate goes
up.
No, if you would be unable to cope with increased
repayments due to rising interest rates. |
|
Tracker |
Similar to a
variable rate mortgage but the interest rate is
guaranteed to be a set amount above the Bank of England
or some other base rate and alters in line with changes
to that rate. |
Yes, with some
loans |
Yes, with some
loans |
Yes, if you want
to be sure that falls in interest rates are passed on to
you in full through a fall in your mortgage rate - but
the drawback is that the mortgage rate also rises in
step when base rates increase.
No, if you find yourself locked into a set amount above
the base rate which is higher than the variable rate. |
|
Fixed interest rate |
Your payments
are set at a certain level for a set period of time -
for example, one year, two years, or five years. At the
end of the period, you are usually charged the lenders’
standard variable rate (or sometimes a new fixed rate is
offered). |
Yes, with some
loans |
Yes, with some
loans |
Yes, if you need
to budget with certainty for the first few years.
Yes, if you think mortgage interest rates will rise.
No, if you think mortgage interest rates will fall. |
|
Discounted from |
Some products
offer a discount from the variable, or other, interest
rate. These normally last for a set period of time - for
example one year, two years or five years. At the end of
the period, the interest rate will rise. |
Yes, with some
loans |
Yes, with some
loans |
Yes, if money is
tight when you first take out the mortgage, but are
confident your income will increase.
No, if you won’t be able to cope when the interest
payments increase later on. |
|
Cap |
Your payments go
up and down as the mortgage rate changes but are
guaranteed not to go above a set level (the cap) during
the period of the deal. Sometimes, they cannot fall
below a set minimum either (the 'collar' or 'floor'). At
the end of the period, you are charged the lender's
variable rate. |
Yes, with some
loans |
Yes, with some
loans |
Yes, if you like
to budget with some certainty.
Yes if you think mortgage interest rates might rise
above the cap.
Yes, if you want the security of knowing that your
payments can’t rise above a set level, but still have
the chance of benefiting from any falls in interest
rates.
No, if you can find a fixed rate set at a lower rate
than the capped rate and you think rates are unlikely to
fall below the level of the fixed rate deal. |
|
Step |
This is where a
mortgage has more than two interest rates. The initial
interest rate and the final interest rate will be
displayed on the table, but to find out what happens in
between, you must look at the product summary. |
Yes, with some
loans |
Yes, with some
loans |
Depends on the
actual interest rate types that make up the steps. |
Other features
Some providers offer flexible features such as allowing
overpayments and underpayments on certain conditions. Some offer
cashback - a substantial cash sum (for example 3-5% of the
amount borrowed) when you take up the loan. They may charge a
higher interest rate in return for this cash sum.
Things to think about before choosing a
mortgage.
How much you can afford.
You should consider how much you can afford now and what
you may be able to afford in the future. Typically, the maximum
mortgage a lender offers is from three to three-and-a-half times
the main earner's income, plus one times any second earner's
income; or two-and-a-half times your joint income. Some lenders
offer more, some less. Others base the amount they lend on an
'affordability' test. Don't borrow the maximum possible if it
costs more than you feel you can afford each month.
Length of the mortgage
term.
Many mortgages are set up over 25years but they can be
for shorter or longer terms. Beware of making financial
commitments that continue past the age that you intend to
retire. When choosing a mortgage, think about the total amount
you will pay over the years, as well as what you pay each month.
With a shorter term, you will have higher overall monthly
repayments but you will pay less in total as you won't pay so
much interest.
The interest rate deal.
Think carefully about any special deals as there can be
strings attached. Check these points:
-
If you can make
lower payments for the first few months or years, you will
then have to make higher payments later on?
-
Often there is an
early repayment charge if you pay off all, or part, of the
mortgage during the period of a special deal. Does the early
repayment charge also apply beyond the end of a special
deal?
-
Can you take the
mortgage with you if you move?
-
For a mortgage with
cashback will you have to pay back some or all of this money
if you repay all or part of your mortgage within the first
few years?
Before you sign up.
-
Check all the
details about the mortgage with the provider or your
mortgage adviser.
-
When deciding on the
best mortgage doesn’t just look at the initial interest
rate.
-
Many mortgages offer
incentives or other features that can affect the overall
cost of the mortgage. Weigh up the features and incentives
offered with the amount you have to pay each month.
-
Consider how
possible increases in interest rates may affect your monthly
repayment.
-
Think of the overall
package and whether it's right for you.
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