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Understanding Mortgages
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What is a mortgage?
- A mortgage is a loan, secured on a property, that is repaid with a predetermined set of payments over an agreed period of time.
- The amount you borrow will depend on your income, outgoings and your ability to pay it back.
- Borrowing for the first time you will need a deposit to put towards the property, which is usually at least 5% of the total cost of the property. Home movers generally use the equity in their property as the deposit.
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Types of mortgage
There are a number of different types of mortgage. The main types are:
Fixed Rate
With a fixed rate mortgage, your interest is fixed for an agreed period. During this period your monthly repayments stay the same so you know exactly how much you’re going to pay each month for a set amount of time. Even if interest rates go up, you will continue to pay the same amount each month, but if they drop your payments won’t fall. Most lenders charge an initial fee for arranging a fixed rate mortgage and if you repay all or a significant part of your mortgage before the end of the fixed period, an early repayment charge is likely to apply.
Variable Rate
Your interest is a set percentage above or below a particular rate for an agreed period of time. If you have a variable rate mortgage your payments will go up or down whenever the rate it is tracking goes up or down. These mortgages usually track either the Bank of England base rate or the lender’s own standard variable rate. Most variable rate mortgages have arrangement fees and early repayment charges.
Offset
An offset mortgage uses the interest you would normally earn on your savings and/or current accounts to reduce the amount of interest you pay on your mortgage. This means you could save money and repay your mortgage sooner.
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Choosing your mortgage
When you start looking at mortgages the choice can seem overwhelming. How can you possibly know whether you’ve got the right mortgage?
Simply put, the right mortgage is the one that is best for your own personal circumstances. The reason why there are so many mortgages available is that everyone’s needs are different. The easiest way to find out which mortgage is best for you is to talk to someone that you trust will give you good advice.
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Repayment options
Repayment (Capital and Interest)
Each payment is made up of both capital (the amount that you borrowed) and interest. This means if you make all of the required payments during the term of the mortgage, your loan is guaranteed to be repaid on time. The amount you owe also reduces each month and you are not dependent on the performance of an investment plan for the repayments of the capital borrowed.
Interest Only
All that you are paying back is the interest. You would need to make separate arrangements to repay the amount you borrowed at the end of the term. Normally, this would mean making a separate payment to an investment plan. This type of mortgage offers a lower monthly payment to your lender as you are only paying the interest (you still need to have a repayment strategy to repay the amount borrowed at a point in the future).
You need to think carefully about which method will suit you best. A mortgage advisor will take you through the pros and cons of both and recommend what’s best for you.
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Where do I start?
One of the first questions you should ask yourself when you start looking for a mortgage is how you’re going to pay it off. Most borrowers opt for a repayment mortgage (referred to as Capital and Interest) but you can also choose an ‘Interest Only’ mortgage if you have another means of paying back the initial loan amount.