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What is a Mortgage?

A mortgage is a sum of money, a lender (typically a bank or building society) lends to a borrower (typically an individual/s) which is then secured against a property. The lender lends the money with an agreement that the borrower will pay them back plus interest on a monthly basis over the term of the mortgage. Should the borrower stop making repayments the lender has the right to take ownership of the property, this is known as a repossession.

For any of you word nerds out there the word mortgage literally (and rather morbidly) translates to “death pledge” which is derived from the old French and Latin language. Clearly, we’ve progressed much further in recent years and your mortgage is anything but this. We see it as the vehicle that allows you to purchase your dream home.

What are the different mortgage types?

There are many different types of mortgages and this section will explore some of the different types available to you. The first thing to understand is the Bank of England base rate. The Bank of England base rate is reviewed monthly and can go up or down depending on the state of the economy. The main measure for this is inflation.

All lenders set their rates based on the Bank of England base rate, so as a result, mortgage interest rates have been low for quite some time now.  This is great news for you because when the rates are low, your payments are too!

The two most popular types of rates are fixed and tracker rates, but there are other types you may want to consider depending on your circumstances, so it’s always best to get advice on the right product for you.

Mortgage Jargon

These are the most popular type of rates (especially for first time buyers) as they allow you to budget month to month. No matter what the Bank of England rate does, your monthly payments remain the same for a set period (usually 2, 3, 5 or sometimes even 10 years).  The advantage of these products is that if mortgage interest rates go up, your monthly payment stays the same, but if the rates reduce, you will not benefit from cheaper monthly repayments. You must get advice on the right product for you as some products come with large penalties if you want to sell your home or pay off a large lump sum within the fixed rate period.

These are typically more competitive than fixed rates as they track the Bank of England base rate and can be more risky. You’ll benefit from lower repayments when rates reduce but if the rates increase you’ll pay more. Some trackers will track over the lifetime of the mortgage but most trackers will be for a set period of time. During this period, there will be penalties with most products, but some come without.

A discounted rate will discount the lender’s standard variable rate for a set period of time. This means the mortgage will be cheaper to start with, but as the lender’s variable rate goes up so will your payments.

Flexible mortgages allow you to make changes to your repayments if your circumstances change. These mortgages allow you to decrease or increase monthly payments, take payment holidays, reduce the loan by paying a lump sum, release capital and offset savings.

There are some important things to consider when looking at this type of mortgage as you’ll usually pay more. There are a limited numbers of lenders that offer these type of facilities and you would lose your savings interest if you opted for an offset.

Every lender has a set Standard Variable Rate and as the names suggests, that rate may vary from month to month. They typically do not directly track the Bank of England base rate and a lender can change them at any time (usually giving 1 month’s notice). This is the rate you will revert to after your initial benefit period has ended (i.e. after your 2 year fixed has come to an end). The SVR’s are generally not competitive as the lenders don’t intend for you to stay on them. The good news is that they won’t tie you in after your initial rate has ended which means you can scan the market and switch to another competitive deal, this is called remortgaging… and yes, you’ve got it, we’ll take care of everything for you!

Bank of England base rate history

August 2006  >  Present

What are the different repayment options?

When you’re looking to take out a mortgage there are three different repayment options available. Lets have a look at what they are and what they mean…

Capital & Interest

This means that your monthly repayment will pay the debt and the interest so at the end of the mortgage term you will be completely mortgage free with no debt to repay. This is important because you’re guaranteed to be mortgage free by the end of the mortgage term (providing you meet all your repayments) and when you retire and your income is likely to decrease, you’ll no longer have any large mortgage payments to meet each month.

Interest only

This means you will only pay interest each month and does not include any debt repayment. At the end of the mortgage term you will need to find another way to repay the debt. You will need some sort of vehicle to repay the debt at the end of the term. Sale of property, savings, pensions and endowments are some of the things you can use however these are NOT GUARANTEED to repay the debt.

Part & Part

As the name suggests, this is where you will have some of the mortgage on repayment and another section on interest only. Similar to the interest only mortgage, you would only want to consider this option if you had a repayment vehicle to repay the interest only section.

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