Mortgages - Which one now ?
Mortgages
For many people a mortgage represents the largest single financialtransaction that they will ever become involved in, and for many peopletheir outgoings on mortgage payments represent their largest singleitem of expenditure.
Therefore, the need to understand how the mortgage market operatesand the options and alternatives open to any borrower is obviouslyextremely important. It should all be relatively straightforward, butthere are now so many options and alternatives available, that it canall appear totally baffling to a typical borrower who is not a“financial wizard”.
The following comments are designed to try and simplify matters a little for you.
The first and most important point is to understand that you canhave either a repayment mortgage or an interest only mortgage. It isvital to understand how each mortgage operates.
Repayment Mortgages
This is where each monthly payment that you make to the bank orbuilding society includes the interest that you owe on the loan, plus asmall amount of capital. This means that the amount you owe isgradually reducing as each payment is made and the amount outstandingreduces to nil at the end of the mortgage term.
Interest Only Mortgages
In contrast, these only involve the payment of interest to the bankor building society, and does not include any repayment of capital.When the mortgage term finishes you will still owe the amount that youoriginally borrowed. You will be expected to repay the capital when themortgage finishes. However, it is up to you to how you fund for thisrepayment.
Therefore, and in basic terms, an interest only mortgage is cheaperthan a repayment mortgage, but with a repayment mortgage you arereducing the amount originally borrowed, during the lifetime of themortgage itself.
Irrespective of whether you have a repayment or an interest onlymortgage, the rate at which interest is applied will depend on the typeof mortgage chosen.
There are a number of options and alternatives here, with the major ones being as follows:-
Fixed Rate
The interest rate is fixed for an agreed period which typicallymight be somewhere between 1 and 10 years. You are protected ifinterest rates rise, but you will not benefit if interest rates fallsince you are “locked in” to a fixed rate arrangement. You may be ableto switch out of a fixed rate arrangement, but there may be costsinvolved.
Variable Rates
Under this type of mortgage, the interest rate will change each timeinterest rates change. However, most lenders tend to “adjust” mortgagerepayments on an annual basis rather than each and every time interestrates change. Under this arrangement, you have no protection at all ifinterest rates rise, but if interest rates fall you benefit from suchreductions.
Discounted Rates
Under this type of mortgage, the bank or building society offerssome form of discount off their normal variable rate mortgage. Theamount of the discount varies from lender to lender, and it is usualfor the discount to last for a pre-agreed term of say 1 or 2 years.
Capped Rates
Under this type of arrangement, the rate of interest does vary, butis “capped” so that it cannot go higher than an agreed level. Forexample, if you had a 6% capped mortgage, it would mean that theinterest payable could not be greater than 6%, but can be lower ifinterest rates fall.
Like many things in life, we feel that there is no absolute right orwrong answer as far as which type of mortgage is best. There are somany variables, and every individual has their own particular needs andrequirements and different financial planning objectives in the short,medium and long term.
The key issue is to make sure that you understand the basicdifferences between an interest only mortgage and a repayment mortgage,and then to truly understand and analyse the different types ofmortgage scheme available to you.
In our opinion you must receive expert advice and guidance from atruly independent adviser, who will be able to compare and contrast foryou all of the options available, so that you can then make an informeddecision as to which mortgage is best for you.