Types of Mortgages
Fixed Rate
Mortgages are available in a number of different interest rate options, one of which is the
fixed rate.
With fixed rate mortgages, the borrower can lock into a fixed repayment cost each month over
an agreed period of time and know that, irrespective of changing rates of interest,
monthly payments will not be affected. Most lenders charge an arrangement fee for the
privilege of receiving a fixed rate. Many refer to this fee as a 'booking fee'.
The fixed rate borrower can rest in the knowledge that his monthly mortgage repayment will not
change for the agreed fixed period.
The longer the fixed rate period, the higher will be the fixed interest rate. Fixed periods
of one to five years are the most popular and most readily available, although fixed rates
that last for ten years up to twenty-five years are often available. At the end of the fixed
rate term, the interest rate usually reverts to the lender's prevailing variable mortgage
rate.
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Flexible Mortgage
A flexible mortgage simply allows you some variations in what you pay and when you pay it.
So you might fancy taking a month off repayments (perhaps you've just come back from holiday),
or indeed you might pay an extra lump sum in because of a lottery win for example! Another
benefit is often the flexibility to move your payment date each month.
This sounds great- flexible mortgages certainly match up to the modern hectic lifestyle
with unpredictable demands on our money, changeable jobs and the ups and downs of
self-employment. If that's you, or you just want freedom to dip in occasionally, then a
flexible mortgage might be what you need.
This also often ties in with ‘offsetting'- allowing you to have your savings
and mortgage account with the same company, which lets you offset the interest on your
savings against your mortgage.
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SELF-CERT
Five years ago, if you could not prove your income to a lender, you were classified in the same way as persons who were bankrupt! That meant you'd have paid an extortionate interest rate, to cover the additional risk that lenders felt you presented to them.
These days that's all changed. The modern economic reality is that we all change jobs regularly; furthermore redundancy is such a common occurrence that more people than ever before are starting their own businesses. Lenders are starting to recognise that company directors, entrepreneurs and the self-employed are not just the engines of the modern economy, but therefore also an essential source of mortgage business; and increasingly lenders are offering them more reasonable deals.
The result is the self-certified mortgage (self-certified refers to the fact that proof of the borrower's income comes not from an employee or accountant, but from the borrowers own statement of fact). Here, the lender will still carry out a credit check; but the deal will be better than the sort offered to bad-credit cases, recognising that the borrower is not incapable of managing their own finances; but merely unable to present the right figures.
The overall cost for comparison is 7.5% APR. The actual rate available will depend upon your circumstances. Ask for a personalised illustration.
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Capped Rate Mortgages
Capped rate mortgages are similar to fixed rate mortgages except that the interest rate can go down if the lenders standard variable rate is lowered.
In other words, the interest rate on the mortgage is capped at a certain level for a set number of years. It is guaranteed not to exceed this level during the capped rate period.
In many ways this is the best of both worlds as you get the security of knowing what your maximum monthly repayments will be for a fixed period, but you can still benefit from any reduction in interest rates.
As with fixed rates, there are normally arrangement fees for this type of mortgage, and it is important to seek advice on whether the benefits of a capped rate deal outweigh any fees that may be charged.
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Discounted Interest Rate Mortgage
A discounted rate works in the same way as a variable rate mortgage, During the initial period of the mortgage, the lender will offer you a discount off the standard variable rate.
Discount Mortgage Rates are set at a percentage lower than the standard variable rate, SVR. They are fixed for a set length of time, normally the lower the term chosen to enjoy the discount, the higher the discount granted.
Of course with the discounted rate mortgage you do not get the security of a capped or fixed rate mortgage but if interest rates are unlikely to fluctuate greatly savings could be made.
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Tracker Rate Mortgages
Tracker rate mortgages have been available for many years. As the name suggests, the monthly repayment goes up and down in line with the Bank of England base rate. When the loan is set up you are advised of the appropriate 'margin' (this is normally the interest rate you will pay, being the base rate plus an additional %) to be applied to the loan.
With this scheme you are guaranteed that a change in base rate will be reflected in the mortgage rate payable.
This means that you cannot predict the monthly cost of the mortgage from one year to the next. This can cause budgeting problems in a period of increasing interest rates. On the other hand, when interest rates fall, there is the guarantee that your mortgage rate will fall by the same amount as the Bank of England base rate. With interest rates used as a regulator for the economy, mortgage interest rates have been known to change frequently.
As an addition to a tracker rate it is possible to get a discounted tracker rate. This is a variation of a variable rate where the lender quotes a discount off of their base rate for a set period of time, after which the rate will revert to the Bank of England base rate plus a percentage decided at outset.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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Kellands Mortgage Management Ltd is an appointed representative of Intrinsic Financial Planning Ltd and
Intrinsic Mortgage Planning Ltd who are authorised and regulated by the Financial Services Authority. FSA No: 448123
Registered in Northern Ireland No. NI054651
Registered Office: 212–218 Upper Newtownards Road, Belfast, BT4 3ET
Directors: Robert Forster Cert PFS Jonathan Finlay Cert PFS. ©2006 Kellands Mortgage Management Ltd. All rights reserved.
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