Mortgages
Mortgages are one of the largest single transactions in most people’s lives.
Buying a property can be a stressful and time-consuming experience; nowadays the financing of a mortgage is a case of finding and selecting the most suitable mortgage, rather than simply accepting a lender’s offer.
Repayment (capital and interest) method
Under the repayment method your monthly repayments consist of both interest and capital and, over time, the amount of money you actually owe will decrease. In the early years, your repayments will be mainly interest, so the capital outstanding will reduce slowly at the start of the mortgage.
This method ensures that your mortgage is repaid at the end of the term, providing all payments are made on time and in full.
Interest-only method
As the name suggests, you will only pay the interest on the amount borrowed and none of the capital, so the capital is still outstanding at the end of the term. Therefore, you will usually need to take out some kind of investment policy to save up enough money to repay the mortgage at the end of the term.
Traditionally, the preferred product for repaying the capital of an interest-only mortgage was a mortgage endowment policy (which included a set amount of life cover). Customers now tend to use Individual Savings Accounts (ISAs) and pensions to build up a sufficient sum and to take advantage of the tax breaks offered by these products.
The information here is purely for information purposes only and does not constitute individual advice.
As a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage repayments.
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Fixed Rates |
Fixed rate mortgages are popular, particularly when it looks like interest rates will be increasing as your mortgage rate is fixed for a set number of years - usually 2, 3 or 5 years but sometimes 10 years. You know exactly how much you'll be paying each month for that length of time, regardless of what happens to interest rates on other mortgages. The downside is that you'll be stuck on a higher rate if other mortgage rates go down. You can get out of a fixed rate mortgage but there'll be an early repayment charge to pay for switching before the end of the period. Good for: clients who are budgeting carefully and want to know exactly how much they'll be paying over the next few years. Bad for: clients looking to move or raise funds before expiry of rate applied for. |
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Tracker Rates |
Tracker mortgages move in line with a nominated interest rate which is usually the Bank of England base rate. The actual mortgage rate you pay will be a set interest rate above or below the base rate. When base rate goes up, your mortgage rate and your payment will go up. When the rate comes down your rate and your payment will come down. Some lenders offer a 'no lock in' so you can get out of the mortgage without a penalty. Most lenders set a minimum by which the mortgage can drop down to. The rate can only last for a fixed period of time, typically 2 to 5 years although some lifetime trackers still exist. Good for: clients willing to accept the risk of higher rates but also the prospect of cheaper rates when rates look likely to come down. Bad for : having peace of mind on your mortgage costs |
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Discounted Rates |
Not to be confused with a tracker rate mortgage the discount is a reduction on the lender's standard variable rate (SVR). Discounted rates can be some of the cheapest around but lenders can and do change rates at will! The rate can only last for a fixed period of time, typically 2 to 5 years. Good for: buyers who want a low rate of interest but can afford to pay more if rates go up. Bad for : having peace of mind on your mortgage costs especially when it's at the lenders discretion |
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Standard Variable Rates |
Each lender will have their own standard variable rate (SVR) mortgage. The interest rate goes up and down as mortgage rates generally change but like discounted rate mortgages, lenders can and do change rates when they want to. Good for: buyers who think mortgage rates are going down and for flexibility when other considerations are in mind. Bad for : paying too much |
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Capped Rates |
A super idea as you have the knowledge that your repayments will never exceed a certain level while you can still benefit when rates go down. They tend to be more expensive than fixed rates but few lenders now offer them. Good for: buyers who believe mortgages rates are going to get a lot higher. Bad for : hardly available and poor choice when rates are increasing |
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