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Choosing A Mortgage
Most people who buy their own home will finance the purchase with a mortgage. A mortgage is a special kind of loan that uses the property itself as security. Although you become the legal owner of the property, the mortgage lender (known as the "mortgagee") also has a legal "interest" with the right to sell the property if you are unable to keep up your mortgage payments. This is a legal arrangement and there are many important issues you need to understand, so you really need professional advice before getting involved with a mortgage. Most banks and building societies offer mortgages, as well as specialist mortgage lending companies. Mortgage lenders have devised many different mortgage products and there is a huge selection to choose from according your individual requirements. Some of the most common types of mortgage you are likely to come across are as follows:
Variable Rate. With a standard variable rate mortgage your payments go up or down with the lender's standard interest rate, which often follows the interest rate set by the Bank of England, so you need to ensure that you would be able to afford the payments if the rate goes up. Some lenders also offer a "cash back" option as well, giving you some extra cash to spend on your new home.
Fixed Rate. With this kind of mortgage you pay a fixed rate of interest for an initial period, so you know exactly what you'll be paying each month during that time. If interest rates go up or down during the fixed rate period, your payments will stay the same, so you don't have to worry about budgeting. When the fixed period ends, you will usually move to the lender's standard variable rate. Again, there will often be penalties for early cancellation. more...
Discounted Rate. With this arrangement you start by paying a lower interest rate to begin with, then move to another rate (usually the lender's standard variable rate) after an agreed period. Obiously you need to ensure that you will be able to afford the higher payments later and you also need to be aware that there are usually penalties if you cancel the mortgage early.
Tracker. Tracker mortgages are typically linked directly to the Bank of England rate or some other 'base rate', so repayments will automatically go down when the base rate falls, but will also increase if the rate goes up. Tracker deals are usually over a set period and there may be penalties for cancelling early. more...
Capped. With a capped rate you pay a variable interest rate, but there is an agreed maximum limit, so your payments cannot go above a certain amount. You benefit from falls in interest rates, but at the same time you do not have the worry about rates climbing too high. If the deal include a 'collar', then this sets the lowest rate, so if interest rates fall very low then you may not get the full benefit.
Offset. An offset mortgage allows you to link your mortgage to a savings or current account, so the total owing on your mortgage is offset by the amount of your savings - the higher the balance in your savings or current account, the less interest you pay on your mortgage, helping you to repay your mortgage faster. more...
Interest Only. With this type of mortgage, your monthly payments cover just the cost of the interest on the loan and nothing more, so you are not making any repayments on the amount borrowed. This may be attractive in the short term in order to keep the mortgage payments to the lowest level possible, but you still need to think about how you will repay the mortgage at the end of the agreed period and this usually means setting up some kind of regular savings plan.
Islamic Mortgage. Because some cultures forbid the payment and receipt of interest on loans, different types of funding arrangements for the purchase of property are also available that meet these requirements. Also referred to as "Islamic mortgages", these are designed specifically to comply with Sharia law and are available from a number of UK financial institutions.
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NOTICE: A mortgage is a loan that is secured on your home and you also need to think carefully before securing any other debts against your home. Your home could be taken away by the lender and sold if you do not keep up the repayments on the mortgage or any other debt secured on it - if you are in any doubt, seek independent professional advice. These notes are offered as a general guide only and do not constitute mortgage or legal advice.
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