Mortgages

When taking on a mortgage commitment all your options should be considered carefully as a long term consideration. These are loans borrowed against an estate. It is a simple product but within a complex market. There are many types of mortgage and one has to understand implication of selected mortgage type and major ones offered mostly by lenders are:

  • Repayment: each payment has an element of interest and loan repayment. There are many variants of how the loan company manages recording and that could impact your mortgage account.
  • Interest only – only interest is paid and principal loan amount repaid at end of loan term or as and when mortgagee chooses to pay and most likely after lock-in period. The borrower is at risk of if total amount cannot be repaid.
  • Endowment: investment product with embedded insurance and loan is to be repaid with investment value at end of term. This is a risky product as investment may not perform well as expected you are then liable to make the short fall.
  • Pension Mortgage: an interest only mortgage and use of pension as an investment plan. The tax free lump sum paid on retirement is used to settle mortgage. Premiums have to be larger than normal and beneficial to higher tax payers due tax repaid to pension. The level of uncertainty with this mortgage type is high as economic factors may adversely change, pension management fees are notoriously high and tax rate may change to adverse effect of pension fund.

 

The Price:

  • Fixed rate – interest rate is fixed for the period agreed and does not benefit if rates fall but is also protected whenever rate rise. Generally, has a penalty clause for not stay with deal for agreed period.
  • Standard variable rate – generally this is the base rate plus a spread and economic performance affects this rate. Lenders tend to increase spread without hesitation and most ignore spread reduction if base rate is reduced.
  • Discounted rate – standard variable is discounted for a period
  • Capped rate – standard variable rate is discounted for a period before reversing to normal standardised variable rate. In a sense it could be termed as fixed rate as there is ceiling rate would not be charged but benefits from lower base rate.
  • Flexible rate – make overpayment as well as take payment holiday for agreed holidays and rates is normally a little higher than fixed and discounted.
  • Tracker rate – fluctuations due to changes in base rate
  • Hybrid – capped mortgage with rate dependant on base rate
  • Offset – savings kept alongside your mortgage and mortgage is payable on net offset. Better strategy if mortgage rate is higher than savings rate.

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