Mortgages

What is a mortgage?

A mortgage is a loan you take out from a lender to pay for a property. If you don't pay back the loan as agreed the lender can take possession of the property and sell it to repay the loan. The loan is divided into the capital (i.e. the amount of money you borrowed to buy your property) and the interest (i.e. the amount the mortgage lender charges for lending you the money ). There are two main types of mortgage, "Repayment" or "Interest". It's the variations on them which make things seem more complicated than they have to be. But it can all be kept fairly simple.

Click Mortgages>> for the latest low interest rates & further information on our Mortgage products. You can even apply online if you wish.

If you are unsure or just wish to discuss your circumstances in more detail then feel free to ring us on 0800.0856253 or e-mail us and an adviser will be glad to talk through your requirements.

A Basic Summary of the Rules

This is a basic summary of the rules of the game when buying a mortgage.

Interest: You borrow money to buy a home. The mortgage lender makes money by your paying back this money with the interest they charge.

Penalties: The lender will try to get you to stay with them by charging you penalties if you leave the mortgage before the agreed time. For example if you decide to get a new mortgage with another lender you may have to pay the existing lender, say, 5% of the all the money you still owe them The likelihood is that the lower the interest rate the higher the penalties - though this isn't automatic and you can get very good deals by shopping around.

Mortgage Insurance: Take into account the cost of related products to the mortgage loan ie, Buildings & Contents, Life assurance, Critical Illness and cover for accident sickness and unemployment.

Your investment: You hope that the value of the property rises over the period. It usually will because of inflation, which makes the amount you borrowed seem smaller and the value of the property seem higher.

Fixed Rate

This is where you and the lender agree to fix the interest rate owed on your loan for a set period of time - usually between 1 and 5 years. After the agreed period, the interest rate owed on your loan usually reverts to the lender's variable rate.

Good points: You know exactly what you'll owe. No surprises.

Bad points. If interest rates drop you may be paying more than you might have done if you'd gone for the discounted rate (see below). But interest rates might rise. If you want to leave before the agreed term the redemption is usually significant. For example you may be charged six months gross interest if you leave a five-year fixed rate agreement. Some could even go beyond the fixed-rate period.

Variable Rate

The Bank of England sets a base rate. The lender's variable interest rate is set higher than the base rate - say 1 or 2% above it. So if the base rate is 5% and you're paying 2% above it you'll be paying 7% interest. If the Bank of England raise it by 1.5% overnight the base rate is now 6.5%. Your variable rate mortgage is now 8.5% i.e. still 2% above the base rate. Each of the have their own variable interest rate. They vary a great deal offering as much difference as 1%. It may not sound much but on a £100,000 loan that's £1000 per year.

Good points. You might get lucky and see the interest rate drop and there could be a cashback payment at the start.

Bad points. You might be unlucky and see the interest rate rise.

Capped Rate

This is where you agree to have a limit - i.e. a cap - on the maximum amount of interest you will pay over a particular period of time while allowing it to fall if the variable rate drops. They're supposed to offer the best of both variable and fixed rate deals.

Good points: You get the best of both worlds. If the rate goes higher than your agreed capped rate then you're only paying up to the agreed capped rate. Where as if it falls below your capped rate then you pay less as well. You benefit from falling interest rates but are protected from rate rises so you know the maximum you'll be paying.

Bad points: There's only a limited number of these deals on the market and they're not thought to be very competitive because the interest rate you'll be paying may be higher than your average fixed or discounted mortgage. However some mortgage lenders are now offering good deals which may even be cheaper than fixed rates.

Discounted Rate

To tempt new customers most lenders will offer a new borrower a discount on their standard variable rate, for a set period. Your payments will go up and down, as with a normal variable mortgage, but you're paying less. After the agreed set period the interest rate will switch into the 's usual variable rate. The rate for new borrowers is usually lower than for existing customers. So try to shake off that customer inertia and change mortgage lenders every couple of years - having checked, of course, that there's no penalty for leaving.

Good points: You're paying less.

Bad points: You're locked in for the agreed term so if the interest base rate goes up you're stuck. However when the period ends, you can swan along to the next best discount rate. The shorter the term the better. You probably don't want to tie yourself down for longer than 2-3 years.

Flexible Mortgage

These schemes vary but most allow you to overpay, underpay or even take a payment holiday. Any unpaid interest will be added to the outstanding mortgage. Any overpayment will reduce the outstanding mortgage. Some now include bank accounts, credit cards and savings accounts under one account to try and offset interest due.

Click Mortgages >> for the latest low interest rates & further information on our Mortgage products. You can even apply online if you wish.

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