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 same lender.
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 over.
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.