MORTGAGE TYPES
HOMEBUYERS often pay thousands of pounds more interest than they need to because
they have the wrong type of mortgage.
Instead of sticking with one lender, many people could save money by seeking out cheaper deals and then swapping.
Borrowers are also catching on to the idea of paying off their mortgage as fast as possible, rather than carrying the burden for the traditional 25 years.
REPAYING YOUR MORTGAGE
THERE are two ways to repay your mortgage -- capital repayment or interest-only. With a capital repayment mortgage you pay off both the interest and the capital loan over the life of the mortgage. In the early years you pay off more interest but later on you make bigger bites into the debt so your mortgage balance reduces. So long as you keep up repayments, your mortgage will be repaid .
An interest-only mortgage pays only the interest to the lender and money could be invested into a savings plan which should eventually produce enough money to pay off the capital element.
Examples include: endowment and an Individual Savings Account (ISA). The drawbacks are that the savings plan may not produce enough money to repay your mortgage, leaving you with a shortfall later in life, as many of endowment mortgage plan holders have discovered.
Most lenders now offer mortgages on a “part and part” basis, namely partly on a repayment basis and partly on an interest-only basis. This is particularly useful for borrowers anticipating a shortfall on their endowment.
In both cases, you should also consider taking appropriate insurance with your mortgage to protect your dependants or yourself if you become sick and are unable to work.
Here, we attempt to guide you through the mortgage maze, weighing up the pros and cons of each different type of home loan repayment.
STANDARD VARIABLE RATE
THIS is the straightforward mortgage rate charged by most lenders. Most of them move their standard variable rate (SVR) within a month of a change in Bank of England base rate.
But they sometimes take longer and often do not move by the same amount.
Every 0.25 % movement in interest rates will alter repayments on a £50,000 mortgage by about £10 a month.
PROS: The mortgage is very flexible and there are often no early redemption penalties for moving to another mortgage.
CONS: Mortgage lenders can be quite slow in cutting their SVRs when base rates are cut. Planning your mortgage budget can be tricky because the monthly payments can fluctuate.
Borrowers should always look around for a better deal from their lender than the SVR and check when a special offer ends so they can avoid spending too much time paying the SVR.
FIXED RATE
PAYMENTS are fixed at a set interest rate for a given period, often between one and five years, although there are few which are fixed for 10 years or even longer. After that period the mortgage may revert back to the lender's standard variable rate (SVR).
PROS: You can budget for a set period, giving protection against rising interest rates.
CONS: You will not benefit from interest rate falls should they happen. Also, you may face lock-in penalties if you want to move out of the mortgage. Steer clear of deals where the penalties run beyond the fixed period .
CAPPED RATE
MORTGAGE payments are based on the lender's standard variable rate with the guarantee that the interest rate will not rise above a certain level for a given period.
PROS: It will protect you against interest rate rises with the added benefit that payments will fall if interest rates fall.
CONS: Capped rates tend to be higher than fixed rates and borrowers are usually locked in for a certain period. Beware of collars on capped rate mortgages, which mean that if interest rates fall, your mortgage might not follow suit beyond a certain point.
DISCOUNT
YOU pay interest at the lender's standard variable rate but with a discount for a given period. Lenders usually offer discounted rates for the first few years of the loan, then switch back to their SVR.
Discounts offered are usually between 1 % and 3 % and are sometimes tiered. The crucial point is the lenders' standard variable rate. A 1 % discount off a low mortgage rate can be worth more than a 1.5 % discount off a higher standard variable rate.
PROS: It provides a guaranteed saving in the early part of the mortgage -- when it's needed most.
If interest rates are expected to fall, a discount mortgage may be a good bet as your monthly payments should drop when rates do.
CONS: It will not be protected from an interest rate rise so you will be unable to budget ahead accurately.
CASHBACK
THE borrower pays interest at the lender's standard variable rate and is given a lump sum to spend how they wish. The lump sum may be as high as 5 % of the value of your loan, although some may only be offering a couple of hundred pounds.
PROS: The cashback could come in handy, providing a lump sum after you move into your new home.
CONS: You may be forced to pay the whole amount back if want to pay your mortgage off or switch lender within the first few years. The bigger cashback deals generally have higher redemption penalties should you wish to move to another mortgage provider. The rate of interest you will be paying is typically higher than the best discounted deals
TRACKER
THE mortgage follows the Bank of England base rate with a fixed margin above or below. A lot of trackers start off with a discount off the base rate for a set period but then move above the base rate for the rest of the mortgage.
PROS: If interest rates fall, the tracker will automatically fall within a pre-agreed period unlike a SVR mortgage, which may delay any interest rate cut.
CONS: You are just as easily exposed to interest rate rises so it's hard to predict your mortgage payments
FLEXIBLE
These are designed to be adaptable and give borrowers greater control over their finances. Over-payments can be made without any penalties so you can pay off your mortgage early if you can afford it.
These over-payments may be borrowed back at a later date and payment holidays may be taken. Many flexible mortgages now offer an “offset” facility where any savings are deducted from the loan amount before calculating the interest payment due. Many may be linked to a current account also.
PROS: Flexible mortgages calculate interest on a daily basis so any extra payments you make immediately cut the interest you are charged. You may be able to reduce payments if personal circumstances dictate. You avoid paying tax on your savings if offset.
CONS: Interest rates on these mortgages tend not to be the most competitive on the market. You may be paying for flexible features which you may not ever need to use. Offsets are usually most suited to those with savings in cash or with income consisting of irregular large lump sums.
