| Types of mortgage | ||
Firstly let’s look at the different ways in which you can repay the interest component; FIXED Simply you elect to fix a rate for a given period, for example; 2 or 5 years. The advantage is you know exactly what you are paying. TRACKER A variable rate, which tracks either the Bank of England base rate or another rate such as the lenders own base rate. As an example Bank of England + 1%. The advantage is your payments will fall if rates drop and the lenders arrangement fee tends to be less but the risk is rates can rise at any time. The highest rates seen in recent history were around 16% for a brief period. DISCOUNTED VARIABLE RATE Very similar to a tracker rate but here you are offered a discount to the variable. OFFSET MORTGAGES Offset mortgages are designed for those that want to repay their mortgage quicker and or make their money work harder. Balances in your current or savings account can be offset against the mortgage balance, for example if you have an average of £1000 balance in current account and £10000 in savings and a mortgage of £100,000, you will not pay interest on £11,000 of the mortgage. This means part of your monthly payment becomes an overpayment. People can use their business turnover to be paid through their offset current account and this means a higher balance on the current account can be offset against their mortgage. All in all a great way to really sweat your money and maximise your total returns. Now let’s look at paying back the capital component; Let’s assume you’ve chosen to fix the interest part. Now all you need do is decide how to pay back the actual capital, that is, the sum you borrowed. CAPITAL REPAYMENT This is simply where a portion of your monthly payment goes to repaying the original loan each month so that at the end it’s all repaid. The advantage is the peace of mind knowing your balance is reducing each month. INTEREST ONLY Here no capital is repaid UNLESS YOU OPT TO MAKE OCCASIOANL OR REGULAR CAPITAL PAYMENTS, on top of the interest. The advantage is a lower committed monthly outgoing, ideal for some people such as those with fluctuating incomes. Some people chose to over pay with lump sums whereas others might chose an ISA or other savings plan to accumulate capital within. Help, how do I know which is best? In practice you tend to get quotes which soon give you a feel for the type of deal that suits you. If a tracker happened to be lower than a discounted variable rate then the decision becomes easier. |