All You Should Know About Mortgage

by MarketProSecure UK

Put simply a mortgage is like any other loan in which you borrow money and then pay it back with interest over a period of time. In most cases when buying a home, this will involve making regular monthly payments over several years. A very important feature of a mortgage is that it is secured on your property, and if for any reason you aren't able to keep up repayments the lender can sell your home to recover their money.

There are two basic payment options when you take out a mortgage. You can choose a repayment mortgage or an interest only mortgage, and you need to give careful consideration to which will suit you best.

With the repayment mortgage each monthly instalment contains an element of interest and a portion of the actual loan, meaning that every payment is reducing the balance outstanding on your loan. However, in the early years most of each monthly payment is allocated against interest.

While this simple direct approach sees your mortgage steadily reducing each month there is potentially a downside. Should you decide to repay early, or move home within a few years of buying your house, the loan amount outstanding will not have reduced by much.

The interest only mortgage has the appeal of allowing you to make lower monthly repayments as you are only paying interest to the lender. The loan itself is repayable as a lump sum at the end of the loan period. In order to meet this obligation you need to take out a savings or investment plan to which you would normally make separate monthly contributions. It is the responsibility of the borrower to monitor their plan (which is usually linked to financial markets) over the years to make sure it generates sufficient funds to pay the loan when it falls due.

When taking out a mortgage you also need to give consideration to the type of interest that is being charged as this can influence the overall cost of borrowing. The Standard Variable Rate is the mortgage lenders own rate, which moves up or down on a scale measured against movements in the Bank of England rate. The Tracker Rate is a fixed rate set above or below the base rate of the Bank of England or other source independent of the lender, and it moves up or down maintaining its fixed differential with the benchmark rate. With the Discounted Interest Rate the borrower benefits from a discount on the lenders standard variable rate for a fixed period of time. After this the interest payment usually revert to their standard variable rate. With Fixed Rate Interest the borrower pays an agreed fixed rate of interest for a period of time and then is usually switched to the lenders standard variable rate. With Capped Rate the borrower is assured their interest payments will not rise above a certain level for the period of the deal in place, after which they usually revert to the lenders standard variable rate. A Collared Rate may be used in conjunction with a capped or tracker rate, and this fixes the lowest level at which interest will be charged.

Paying a full term standard variable rate mortgage will almost certainly prove expensive when compared to other deals. However, it generally gives the borrower freedom to pay back extra amounts to clear their loan early or to leave their lender without penalty. A discounted interest rate has immediate appeal as it reduces your payments for a period. However, you have to remember that payments will increase at some point and you must budget to meet them. You may also find you cannot leave your lender without penalty.

Because people's circumstances are different and the terms and conditions attached to mortgages vary from lender to lender, it is impossible to recommend a specific package to suit everyone. You should shop around to find the deal that best suits your plans and financial circumstances, ensuring you settle for an established, reliable lender as featured on the MarketProSecure UK site, who is keen to discuss and meet your needs.

Published: January 4, 2008

Similar Articles and Information Resources:

Bookmark this page

For more new articles see our Personal Finance Learning Center section.