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Generally speaking there are two types of mortgage, a repayment mortgage and an interest only mortgage.
Some mortgages allow you to make overpayments, take payment holidays or to offset interest on savings to help reduce the amount you owe.
With a repayment mortgage a loan is taken out over a number years and at the end of the term the mortgage is repaid in full. Monthly payments are calculated using the specified rate of interest, the loan amount and the term. These monthly repayments consist of both interest charges and capital repayments.
As with a repayment mortgage, an interest only mortgage is taken out over a specified term, usually a number of years. Monthly payments consist of interest charges only and no capital repayment is made.
At the end of the mortgage term the original mortgage amount needs to be repaid in full so it is important that a suitable savings plan or assets have been accumulated to meet the mortgage repayment.
Historically an Endowment policy was a popular way to repay a mortgage, although in recent times there have been many problems with endowment shortfalls.
Both repayment and interest only mortgages can be offered with many different interest rate options. Some mortgage products offer flexibility with features to allow overpayments and the ability to offset interest on savings to reduce the mortgage balance.
Fixed rate mortgage.
As a borrower you are offered a fixed rate of interest for a fixed term. The rate is guaranteed and remains unaltered despite changes in overall interest rates. It can work to the borrower’s advantage and disadvantage.
The length of the fixed rate is agreed at outset between the lender and the borrower and could be anything between a few months and a few years.
Tracker & variable rate mortgage.
The rate of interest required by the lender will vary from time to time in line with overall interest rates. This can be to your advantage if interest rates fall and conversely if they rise. Many lenders modify the payments on an annual basis.
Capped and collared mortgages.
The borrower is charged the current interest rate, say 7%, but is given a guarantee that the rate will never rise above, say 10% - a cap.
Conversely the interest rate paid by the borrower will not be allowed to fall below 6.5% (the collar) even if overall rates fall beneath this.
Lenders offer a discounted rate of interest for a short period usually a maximum of 12 months e.g. 3.75% discount for 12 months.
The discounted rate is usually only offered to first time buyers. At the end of the discounted period the rate of interest reverts to the current variable rate being charged to borrowers.
Offset mortgages offer a degree of flexibility when compared to some other types of mortgage and are particularly suited to people who have significant savings or can maintain a large bank balance. Such individuals may be self employed receiving sporadic payments and drawing income when necessary, or directors of companies receiving income through dividends. mortgages offset >>
When taking out a mortgage it is important to consider any conditions related to the early repayment or redemption in case you want to switch lenders. Some mortgage lenders offer attractive initial rates but have extended tie in periods where the rate reverts to their standard variable for a period.