Choosing the right mortgage can be daunting and confusing, so to ease the process here is our guide to some of the most common mortgages on offer.
These are:
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Repayment
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Interest-only
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Fixed-rate
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Capped
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Discounted
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Flexible/Offset
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100% and over
Repayment
A repayment mortgage does what it says - each month you pay an amount to the mortgage company that includes interest as well as a small payment of the capital (the actual amount you have borrowed). By the end of the term (the amount of time you have chosen to pay the loan back over), you will have paid off the whole loan and you will own your home.
Initially, the repayment in capital is smaller than the interest. Over the years this reverses, so you gradually pay more capital than interest.
Interest only
With an interest-only mortgage you only pay the interest accrued on your debt, which is cheaper per month than a repayment mortgage. However, at the end of the term you will still owe the original amount borrowed because you never paid off the capital.
You need to set up some sort of savings plan that will pay out enough to cover your capital when the mortgage term ends - Individual Savings Accounts (ISAs) and pensions are popular. However, investments are not guaranteed to pay off the full amount when you need them to.
Endowments used to be popular as a savings method, but many people who took out endowments in the past found that their policies had not performed well enough to pay back the mortgage.
If you opt for an interest-only mortgage because you're are on a tight budget, consider changing to a repayment mortgage when your finances allow.
Fixed-rate
Many first-time buyers go for a fixed-rate mortgage as it keeps the payments low for the first year or however long the deal is fixed for. With this product you will know what your mortgage payment will be each month and won't have any surprises if the Bank of England raises interest rates. However, if interest rates fall during your fixed period, you will continue to pay the higher rate until the end of the deal.
Try to avoid fixed deals that tie you in after the special rate has ended. Most fixed deals only allow you to pay off up to 10% more of your mortgage each year, which is a bind if you are keen to pay it off quickly. In addition, there are usually severe penalties if you pay off your mortgage or switch it within the fixed period.
Capped
The amount you pay per month with a capped mortgage goes down in line with interest rates, although the repayments won't go up if rates rise (the cap part of the deal). There are fewer really cheap capped deals than fixed deals on the market at any one time.
Discounted
Discounted rates - where the company offers a percentage off their variable rate for a year or so - can be useful for first-timer buyers, as they have cheaper payments from the start. The variable rate, and consequently the discounted amount you pay, can go up or down with the changes the Bank of England makes.
Flexible/Offset
Flexible or offset mortgages are worth considering as they offer flexibility including overpayments, underpayments, payment holidays, and an available funds facility. They also allow borrowers to offset their savings against their mortgage, which reduces the amount of interest to be paid substantially.
If you have overpaid in the past and then run into financial difficulties, flexible mortgages normally allow you to borrow back some of the money you have paid, or up to your agreed available funds facility. Most flexible mortgages are offered on a variable rate of interest. Keep control of any re-borrowing (drawing downs) otherwise you may lose the benefit.
100% or more
100% mortgages appeal to first-time buyers who can't raise a deposit. This type of loan covers the entire cost of the property, but beware - in a slow market where property values are dropping, you become vulnerable to negative equity (the value of your home being lower than your mortgage debt).
Some lenders will even offer 110% or more mortgages, designed to provide some spare cash during a time of heavy financial outlay.
Cashback
Cashback mortgages give you an upfront cash payment, or an annual cash payment, in return for your loyalty to the lender for up to five years. Part of the catch is that you usually have to pay the lender's variable rate for that time - variable rates being notoriously expensive on the whole - and there are severe financial penalties imposed if you want to move your mortgage before the loyalty tie-in has ended.
To get independent mortgage advice, visit whathouse mortgages
This article was last updated on Wednesday 6th September 2006