A mortgage is a long-term loan secured on your home, which usually runs
for a fixed period, typically 25 years. The market is evolving and you
can now agree more flexible mortgages that allow you either to repay
your mortgage early or apply for an extension, depending on your
circumstances. Be prepared to shop around and seek independent financial
advice because the recent huge increase in competition in the mortgage
market means there will be a deal to suit most people's needs (and
pockets!) Below is some information about mortgages. It is not intended
to be a comprehensive guide, but it should give you a basic idea of what
is on offer and what type of deal is best for you.
- Repayment mortgage: You repay a proportion of the loan each
month, plus interest. This is the most traditional type of mortgage and
it will usually offer some flexibility whereby you can increase your
capital payments to pay off the loan sooner than first agreed.
- Interest-only: You only pay the interest each month, but also
put money into a savings scheme to pay off the outstanding debt in a
lump sum at the end of the mortgage term. If you choose this type of
mortgage, your investment scheme should be reviewed regularly.
- Flexible: You borrow up to a certain amount, which enables you
to increase or decrease your mortgage depending on your circumstances.
This mortgage is designed to reduce the overall amount of interest you
pay over the mortgage term.
- Offset: The mortgage will be either a repayment, an
interest-only or a flexible mortgage, but you can offset the balance of
your mortgage against the amount in any other accounts held with the
There are also different ways to have the interest on your mortgage
calculated. Again you must decide which one best suits your requirements
and financial circumstances. Whatever method you choose, it is wise to
have a buffer zone in mind that allows for a rise in interest rates. It
is vital to remember the loan is secured on your home and you could lose
it if you cannot afford the repayments.
- Fixed rate: The rate is set at a certain level for an agreed
period, typically between one and five years. This is an attractive
option for people who want financial stability. Be aware that your
interest rate could increase at the end of the initial period.
- Variable rate: The rate fluctuates depending on the Bank of
England's base rate. Plan for all eventualities. The rate might go
down, but, equally, it can easily go up.
- Capped rate: The rate is allowed to fluctuate but is
guaranteed not to exceed a certain level. Where there is a 'cap' there
is usually a 'collar', which is the level the rate cannot fall below.
- Discounted rate: The mortgage lender gives you a lower rate
than their standard variable rate for an agreed period of time. This is
designed to entice you into taking out a mortgage with them so make
sure you know what the rate will rise to after the discounted period is
You are not obligated to take out a mortgage with anyone. Shop around
and get the best deal for you - you could save thousands of pounds in
the long run. Remember that with so much competition in the market, the
mortgage lender needs you just as much as you need them. As a final
word, below are a few things you should watch out for with mortgage
deals that appear too good to be true.
- Check what arrangement fee the lender charges and find out how
much, if any, of it you will be refunded should you eventually decide
not to take out a loan with them.
- Make sure you are aware of any extra costs involved, such as
mortgage indemnity guarantees and building and contents insurance.
These can be easily hidden.
- If you are planning to sell the property you buy in the near
future find out if you will be able to transfer the mortgage onto
another home without a redemption penalty.