Mortgages come in many 'forms and guises' and if you're not one of the fortuitous few that can buy your home for cash, then like many - you'll need a mortgage.
Mortgage - definition - quite aptly the definition of 'mortgage' is derived from the French language meaning “Death-Guarantee” - for some this just might be the case.
When taking out a mortgage you have to remember that the banks, building societies and mortgage brokers are there to make money. If you see an unbelievable -' must go for' - rate, then 'what is given on the one hand is usually taken by the other'. So you will need to weigh up all the charges within any mortgage deal.
The typical charges levied when taking out a mortgage are:
- The Interest Rate
- Arrangement Fee's
- Survey Fee's
- Legal Fee's
- Household Insurances'
- Health and Life Cover
- Insurances againist Unemployment or Redundancy
- Redemption Charge’s - If paid early
Choosing the right mortgage for you means having to find one that meet your financial needs; one which will consider your financial status, your age, and lifestyle. Your best mate may have ' the deal of the century', but it may not suit you financially. So word of advice – ‘don’t let a family member or a friend be your mortgage adviser' - find an expert, such as an IFA or deal with the lending managers at a bank or building society.
When you take out a mortgage there are essentially three ways in which you pay the lender back.
These are structured so that the monthly payment comprises elements of interest on the capital borrowed and the capital i.e the amount borrowed originally to be paid over the term agreed. But paying the capital means the total amount owed decreases overtime and you eventually pay off the loan.
2. Interest Only Mortgages
With this type of mortgage you never pay the capital borrowed only the interest occurred. These mortgages are usually accompanied by a method of paying the loan back by ‘investment vehicles’ such as endowment mortgages, pension schemes, ISA, PEP’s, and etc. Some lenders also accept that, at the end of the term of the mortgage, the property can be sold to pay back the loan or refinanced to pay back the sum borrowed.
3. Flexible Mortgages
These originated in Australia. The concept lies in the name 'flexible'. Such mortgages mean that you can make overpayments, underpayments, and take mortgage holidays without incurring penalties. Usually your earnings and savings sit in the same account with your mortgage. The mortgage is calculated daily, so even small overpayments each month means substantial savings in interest paid. It also allows you to pay the mortgage early without any redemption penalties.
Interest and How its is Calculated
A capped rate mortgage is where an interest rate charged on a loan cannot go past the maximum for a period of time agreed, when the mortgages taken out. Your payments never go over the capped rate. However, there is also a minimum rate of interest charged even if the rate falls below this rate. So you could end up paying more than the standard variable rate of interest. These mortgages can be great to start with but you could lose out later.
This is usually variable rate set below the lender's standard variable rate. Should you wish to pay the loan back before the term of the discounted period, then there is usually an expensive redemption penalty to be paid -- even when the discount ended.
3. Base Rate Trackers
These mortgages track the Bank of England base rate by a set amount.the When the base rate changes so does you mortgage -- either up or down.
The rate at which you take these mortgages are fixed for a period of time. This can be anything from one year to three years. At the end of the fixed rate the rate goes to the lender’s standard variable, however sometimes you may end up paying a percentage point above this. These mortgages also carry expensive redemption fees if you pay the loan back only.
Standard variable-rate mortgages offered by lenders usually fluctuate in line with the Bank of England base rate. The base rate set by the Bank of England is the rate at all mortgage rates are compared with. Typically it is shown as a percentage above the bank base rate i.e. 1.25% or 1.35% over.
When taking out any mortgage you must take into consideration the present economic climate and financial markets. These fluctuate daily and any changes in the bank base rates will affect the amount you pay each month. Even if you initially take a mortgage deal, you will also have to calculate what the potential mortgage could be if there are rises in interest rates. The best way to do this is calculate your mortgage repayments if interest rates went up by 0.25%, 0.5%, 0.75%, 1%.
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