Mortgage Basics
In simple terms a UK mortgage is a loan you take out from a mortgage lender in order to help pay for your property. If you fail to maintain the repayments the mortgage lender then has the right to take possession of the property and sell it as a means of recovering the money they are owed. A mortgage is made up of two principle elements:
- The capital which is the sum of money you borrow from the lender to actually buy the property.
- The interest which is the amount the mortgage lender charges you for your loan.
There are two main types of mortgage you need to consider:
- Repayment - This type of mortgage remains the only way the property is guaranteed to be yours at the end of the mortgage term. The mortgage debt is divided into capital repayments and interest payments (the interest being charged on what you have borrowed). With each monthly payment you actually pay off a bit of the capital and a bit of interest until the full debt has been repaid.
- Interest-Only - With an interest-only mortgage you repay only the interest due on the capital each month. As you are not paying any capital the repayments are much lower than those of a repayment mortgage however at the end of the mortgage term you still owe the capital sum. The concept of an interest-only mortgage is that you set up a separate savings plan alongside your mortgage into which you make monthly payments.
When considering a mortgage it is important to know how much the interest rate is and what type of interest repayment arrangement it is. Listed below are the main interest repayment types.
- Fixed Rate Mortgages - This is where the mortgage lender agrees to fix the interest rate on your loan for a set period of time (usually between 1 - 5 years), after which the interest rate owed on your loan reverts back to the lenders variable rate. The plus side of this arrangement is that you know exactly what you owe each month. The downside is that should interest rates drop you could be paying more than you need to.
- Variable Rate Mortgages - A mortgage lender will have a standard variable rate of interest on which all mortgage deals are based. This standard variable rate is determined by the Bank of England’s base lending rate which is decided each month by the Bank's monetary policy committee. As the MPC raises its rate so does the mortgage lender and likewise should the interest rate be lowered. However most mainstream lenders will set their standard variable rate at some 2% points above the Bank of England's base lending rate.
- Capped Rate Mortgages - Basically this is a variation on an interest repayment. Capped rate mortgages claim to offer the best of both variable and fixed rate deals. It works when a cap is agreed on the maximum amount of interest you will pay over a set period of time, during which it may fall should the variable rate drop. The advantage of a capped rate is that should the variable rate increase you only pay up to the agreed capped rate. However if it falls below your agreed capped rate you actually pay less.
- Discounted Rate Mortgages - This too is an interest repayment variation. Lenders offer new customers a discount on their standard variable rate for a fixed period after which time the interest rate will revert back to the lenders standard variable rate.
- Fix and Track Mortgages - This kind of mortgage starts off with a fixed rate for the first year or so and then turns into a tracker where the interest is charged at a set percentage above the bank of England's base lending rate for the rest of the mortgage term. The fix rate period protects you from further increases and as it converts into a tracker it then allows you to benefit from any potential decreases in the interest rate. However a substantial deposit may be required for this type of mortgage and may therefore be more suitable for remortgage customers rather than the first-time buyer.
With so many mortgage deals available choosing the right one for you can be confusing. It might be a good idea to start by deciding which type of mortgage you don’t want and by using the process of elimination you can then draw up a shortlist. You may find it easier to seek the advice of an Independent Financial Adviser or a Mortgage Broker who will be able to search the Whole of Market and find deals that you otherwise may miss out on.
If you're looking for a mortgage to fit your exact needs, then MoneyOutlet can help you quickly. Compare over 8,000 mortgages in less than 2 minutes. Apply Now for your free mortgage quote!
Published on September 21, 2007
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