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Using our recommended mortgage adviser can help take away that daunting feeling when faced with the maze of mortgages available to you. At Paul & Co. our professionally qualified mortgage experts will help you to understand the mortgage market. They will search through a wide range of lenders to find the most suitable deal for you and they often get access to mortgage products not available to high street lenders. Why not view our mortgage guide and see how they can help you?
What is a mortgage?
A mortgage is really just a loan although it is designed to be paid back with interest over a long period of time, usually 25 years. A mortgage is a secured loan, which means that in return for lending you money, the lender (a bank or building society) uses the property as security for the mortgage. Therefore if you can't repay your debt the lender has the right to reclaim your house and sell it to recoup the money you borrowed.
There are basically two ways of repaying your mortgage: interest only or repayment.
Interest Only Mortgage
Here, your monthly payment doesn't reduce your actual debt - it just covers the cost of borrowing the money, ie the interest. Therefore after 25 years of paying the interest only on a £100,000 loan for example, you will still owe £100,000. You would need to set up an investment which would build up enough money to pay off what you borrowed at the end of your mortgage term. With this type of mortgage there is a risk that the value of the investment may not be enough to pay the debt. The most common forms of investment used are endowments, certain types of ISAs and pensions.
With a repayment mortgage each month you pay part of the interest and part of the loan so that by the end of the mortgage term you will have cleared the interest and the loan and owe nothing. Some lenders will consider offering a part repayment, part interest only mortgage which is a combination of both methods.
Types of Mortgage
Standard Variable Rate (SVR)
Each lender offers a Standard Variable Rate which tends to follow - but is not the same as - the Bank of England base rate. As the Bank of England base rate shifts up and down, so lenders move their SVRs, however there is sometimes a delay and there is no guarantee that the lender will pass on the full effect of the increase or decrease. When the interest rate goes up the amount you have to pay each month goes up, and it falls when interest rates come down.
Unlike the Standard Variable Rate, a tracker mortgage follows the Bank of England base rate absolutely. So if the base rate rises by 1% your mortgage rate rises and if it falls by 1% your mortgage rate drops by that amount as well. Some tracker mortgages have a floor - a minimum level below which the rate will not drop. Some trackers only run for a couple of years, but often you can get one lasting the full term of your mortgage.
A discounted interest rate gives you a reduction of, for example, 1% off the lender's Standard Variable Rate for a specified period of time. You can get a discount off a tracker rate rather than the SVR. It is important to know how big the discount is, the interest rate the discount is off, and the length of time the discount will last.
Fixed Rate Mortgage
Whatever happens to interest rates, your monthly mortgage repayments are fixed for as long as the deal lasts - usually not the whole term of the mortgage. Your payments will not go up during a fixed mortgage no matter how high interest rates go, however if interest rates fall you will not see your payments drop.
This is a part variable and part fixed mortgage. The rate you pay moves in line with the base rate but there is an upper ceiling or cap - a maximum rate above which your payments will not go. You benefit from interest rate falls and have some protection against interest rate rises, but the cap tends to be set quite high.
Current Account Mortgage
This type of mortgage combines your mortgage and current account to give you one balance. Some lenders in this sector also link savings accounts, credit cards and personal loans together into combined accounts. With this type of mortgage, you are only charged interest on the total amount you owe the lender, after taking off any savings or current account balances against the amount of your mortgage.
An offset mortgage keeps your mortgage, savings and current accounts in separate pots, although your savings are used to offset or reduce the amount you owe on your mortgage. You can be effectively overpaying your mortgage every month and so could clear the mortgage more quickly.
This was just a quick guide to the maze of financial products out there. If you require further information or require a quote for a mortgage please contact us - details above.