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Mortgages

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The Mortgage Market

Nowadays there are many different types of mortgage available offering various financial incentives to the potential borrower. They can be obtained from a variety of sources such as banks, building societies, and other lenders, or via an intermediary. Some intermediaries offer products from a restricted range of lenders, while others are truly independent and offer products from the whole market place.

Mortgage Types

Nowadays there are several different types of mortgage available, each of which has specific features and incentives to consider.

Standard Variable Rate Mortgage

Most lenders have a set rate of interest known as the standard variable rate (SVR). This is usually the rate that is charged to existing borrowers after any product benefit (e.g. discount or fixed rate) has expired. The rate usually varies in relation to the increases and decreases imposed by the Bank of England on interest rates.

New borrowers would rarely need to take out a mortgage at the standard variable rate.

Fixed Rate Mortgage

The attraction of a fixed rate mortgage is that the monthly costs will remain the same throughout the period of the fixed rate. This usually enables borrowers to plan their budgets well into the future and benefit from protection against a sharp rise in interest rate. On the other hand borrowers could lose out if interest rates generally fall during the fixed period.

Discounted Mortgage

Lenders often offer discount incentives on their standard variable rate for a given period of time. In effect borrowers have a variable rate mortgage but it will remain at an agreed margin below the lender’s standard variable rate during the agreed discount term.

Capped Rate Mortgage

With a capped rate mortgage rate the rate you pay is guaranteed not to rise above the pre-set ceiling for an agreed period of time. If the lender's standard rate is below the pre-set ceiling, the rate you pay is the standard variable rate; otherwise you will pay at the ceiling rate. So as with rate mortgage, the borrower is protected from rises in prevailing interest rates but will not lose out if interest rates fall.

Flexible Mortgage (Sometimes called ‘Australian Style’ mortgage)

Many lenders are now offering variable rate mortgages, often below the standard variable rate, where the borrower can choose to make overpayments, underpayments, or take a payment holiday for an agreed period of time. Making overpayments can significantly reduce the cost or term of the mortgage. Some lenders even allow borrowing against the equity in a property, and will issue a chequebook for drawing funds.

Tracker Mortgage

This is a variable rate mortgage where the rate is linked to the Bank of England base rate, usually for a fixed period of the full term of the mortgage. These are increasing in popularity, as the rate you pay is often less than the standard variable rate.

Repaying a Mortgage

In general terms there are two main methods of repaying a mortgage, the repayment method (sometimes called capital and interest), and the interest only method.

Repayment Mortgage

With this type of mortgage the monthly payment will include both the lenders interest and an additional amount, which will reduce the balance on the loan. The lender to make sure nothing is owed by the end of the agreed mortgage term will normally calculate payments.

Interest Only Mortgage

As the name suggests, each month the borrower simply pays the interest charged by the lender. They do not pay any capital so the loan outstanding does not reduce. Instead, the borrower will usually put in place a regular investment plan to run the same term as the loan. Whilst endowment policies have to date been the most common type of investment plan, these are rapidly falling out of favour as many borrowers are being advised there will be insufficient funds at the end of the term to repay the loan. ISAs are becoming the most popular investment vehicle, offering greater flexibility.

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