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home>>family>>property>>mortgage types

Mortgage Types


Finding the right type of mortgage and repayment method for you is crucial. This is an area where independent financial advice is essential.

Repayment Mortgage
Each repayment contains some capital and interest. In the early years, the monthly repayment is made up almost entirely of interest. There will be a gradual reduction in the amount of capital owing. This mortgage is guaranteed to be repaid in full so long as you make each repayment when it is due.

Standard variable rate mortgage
Lenders set a standard variable mortgage rate which will fluctuate in line with the market conditions. It can prove to be a suitable option for those whose immediate future is unplanned and who may not wish to commit to a product which includes a tie in period in the form of redemption penalties. But can be difficult to accurately budget for your mortgage payments.

Discounted variable rate mortgage
Discounted variable rate mortgages involve paying a set amount below the basic variable mortgage rate for a certain number of years. After the discounted period the rate will revert to the standard variable rate. There will usually be a charge for early repayment.

Fixed rate mortgage
A fixed rate mortgage allows you to fix your monthly payments for a specified period of time. After the fixed rate term has expired, the interest rate will revert to the standard variable rate available at the time. It may be possible to fix again when the period ends. This mortgage allows easy budgeting because you know exactly how much your monthly payments will be.

Fixed rate mortgages will protect you against possible rises in variable rates but, if general rates fall below the level of the fixed rate then this could work out a more expensive option.

Flexible mortgages
Allows you to make additional or lump sum payments in excess of your scheduled monthly amount, enabling you to pay off your mortgage early. This reduces the amount of interest charged. In addition, you can choose to re-borrow the money at any time.

Capped rate mortgage
Somewhat like the fixed rate in that the maximum amount you pay is determined during the given capped period, however if interest rates come below your capped rate then your rate will reduce to that rate as appropriate.

Cash backs
The lender gives you either a percentage of the loan or a flat amount as a cash incentive. This is not added to the loan and does not attract interest, though it may be repayable if the loan is repaid before a given period of time. It is common for a cashback to be combined with other mortgage products such as fixed or discounted rates. Cash back appeals particularly to first time buyers, money can be used for legal fees, soft furnishings etc.

ISA (Individual savings account)
Throughout the period of the loan only the interest is paid off. At the end of the loan period the loan amount is still to be paid off. To pay this amount a separate endowment policy or other suitable strategy is created at the start of the loan period. The funds created by this are used to pay off the loan. If the investment has done better than expected then you will have the surplus funds. However, if the policy does not cover the loan amount you will have to cover the shortfall.

If you have any dependents it is a good idea to make sure that, in the event of you becoming seriously ill or dying, they can continue to live in your home.

Other charges

Valuation Fee: depending upon a) the lender b) the type of valuation/survey you require.

Lender's Arrangement Fee: payable either in advance or on completion and is sometimes added to the loan

Legal Fees: Solicitor's fees which may include the need to pay

Stamp Duty, Local Searches, Conveyancing Costs and Land Registry Fees.

Stamp Duty: Effectively a purchase tax. Properties valued at over 60,000 attract a tax of 1%. Properties valued at over 250,000 are taxed at 3% and over 500,000 4%.

Higher Percentage Lending Fee: An insurance fee if the mortgage is more than a certain percentage of the value of the property. This is used to protect the lender and not you. If the lender claims on the insurance policy you will owe the insurer the amount paid out.

Buildings and Contents Insurance: All lenders require that you insure your property to the full cost of rebuilding it. You should also have the contents of your home insured in case of a burglary, fire etc..

Mortgage Payment Protection: This will help protect your mortgage and you in the event that you are unable to work through accident, sickness and/or involuntary unemployment.

You should always seek professional help before deciding on a mortgage.

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