|
|
Types of mortgages available and tips that are valid worldwide
When looking for a mortgage, it is important to find the 'deal' that
best suits you. No doubt you will have heard by now about variable
rate, fixed rates, money back mortgage and so on. But what are they
exactly? Below is a simple description of the choice available.
Just remember that the most important points are:
1) how you pay back the capital you borrow and
2) how you pay the interest on it.
1) Paying back the capital
You can either pay a little at a time as you go (repayment mortgage)
or pay it all off at the end (Endowment, Isa and pension mortgages).
Repayment mortgages Each monthly payment pays
off a little of the capital debt. At the end of the term the
mortgage is cleared. You may need to take out separate life
assurance.
Endowment Mortgages They use an endowment
policy to provide life insurance and save funds to repay the loan at
the end of the term (usually 20-25 years). You may have a cash lump
sum in addition to the loan being repaid if the investment performs
well. If it performs badly you may not have enough to cover the
loan.
Individual Savings Account (Isa) mortgages
They work on the same principle as endowments, but use an Individual
Savings Account as the loan repayment method.
Pension mortgages
They are similar, but work on the basis that pensions (both private
and company) provide tax free cash on retirement. At the end of the
mortgage term the loan is paid out of your tax-free lump sum. They
are not often used as it can be risky linking pensions to other
investments.
2) Paying the interest
You have to pay interest on any debt, and mortgages are no
different. They differ only in the range of options offered.
Variable rates
This means that you pay the going rate on your loan. The mortgage
rate changes every time interest rates change or, as in most cases,
the overall effect of any interest rate changes is calculated once a
year and payments are altered accordingly. Whatever kind of mortgage
you start with, it is likely to change to variable rates at some
point.
Fixed rates
They are what they say. The interest rate is fixed for the period
agreed - often two to five years. These are ideal for budgeting or
if you think rates might increase. You do not benefit if rates fall,
and will face penalties if you try to quit.
Very low rates may tempt you, but they can be used to trap you into
paying over the odds.
See how long you will have to stay with the lender before you can
switch without penalty.
Capped rates
These are fixed, but if rates fall you pay the lower rate. Such
deals can be a good buy for budgeting.
Cashback deals
These are where lenders offer money back if you take out a
particular product.
Discounted rates
They offer a permanent discount off the lender's variable rate. The
rate you pay will fluctuate in line with changes in the variable
rate. The discount applies over a set term.
|
|