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Wednesday, 3 October 2012

Types of mortgage

When you choose a mortgage, you'll need to think about the repayment method, interest rate deals and special features of some mortgages. The best one for you will depend on your circumstances - so it's important to understand your options and shop around

Repayment methods

There are the two main ways you can pay off your mortgage. These are called 'repayment' or 'interest only'.

Repayment mortgage

With a repayment mortgage you make monthly repayments for an agreed period (the term) until you've paid back the loan and the interest.

Interest only mortgage

With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan. You'll normally also have to pay into another savings or investment plan that'll hopefully pay off the loan at the end of the term.

Follow the links below to the Money Advice Service website for more information.

Interest rate deals

As well as deciding on your repayment method, you'll need to look at the interest rate deals on offer, for example:

Standard variable rate

With a standard variable rate (SVR) mortgage your payments go up or down according to the lender's standard interest rate. This is an interest rate that is set by individual lenders and is not directly linked to the Bank of England's base rate.

Standard variable rate with cashback

With these deals you get a cash lump sum as well as the loan when you take out the mortgage. You're usually tied into the variable rate for a set period.

Discounted rate

You pay a lower interest rate to begin with then move to another rate (usually the lender's standard variable rate) after a set period.

Tracker

Tracker rates are linked to the Bank of England rate or some other 'base rate'. This means they'll always go up or down in line with changes to the base rate.

Fixed rate

You pay a fixed rate of interest for a set period, so you know exactly what you'll be paying each month during that time. When the fixed period ends, you'll usually move to the lender's standard variable rate. There are usually penalties if you pull out early.

Capped or cap and collar

With a capped rate you pay a variable interest rate, but there's a ceiling so your payments won't go above a certain amount for a set period. Some deals include a collar too - this is the lowest rate you'll get. If interest rates fall below the collar, you'll lose out.

Which type of interest rate is suitable for you?

Suitability of different deals will depend on your personal circumstances and any tie-ins or penalties that may be attached. For more information on the pros and cons of different interest rate deals visit the Money Advice Service website.

You'll also find information on how the 'APR' (annual percentage rate), which is always quoted alongside interest rates, can help you compare deals.

Flexible, current account and offset mortgages

Flexible, current account and offset mortgages give you more control to vary your monthly payments. They can be used with repayment or interest only mortgages. For example you can:

  • pay less one month and more the next
  • make lump sum repayments (and sometimes draw these back)
  • take a 'payment holiday'
  • pay off your mortgage early

Calculators to help you compare mortgage deals

You can use the Money Advice Service's online mortgage calculators to work out monthly payments based on different interest rates. But bear in mind that they don't account for extra costs, such associated insurance and investment policies.

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