Understanding Mortgages
Capped Rate Mortgages
In a nutshell, a capped rate mortgage is a mixture of a variable and fixed rate mortgage. This means you know the maximum interest rate you will pay, but there is no minimum.
This gives you peace of mind - you benefit from low interest rates but are insured against high rates. But there is a price for such a win-win deal: the basic variable rate charged by the lender will be a little higher than their normal variable rate.
Cash Back Mortgages
As an incentive, the lender offers a lump sum of cash once the mortgage has been taken out. The amount will vary from lender to lender and on the size of the mortgage. The amounts can range from a flat fee of £200 to a percentage of the loan.
Normally the cashback is offered as a package of benefits, but pure cashback products are not uncommon. Mortgages offering 5 or even 6 per cent cashback can be found. This would mean that a borrower taking out a £50,000 mortgage would receive £3000 on completion (at 6 per cent).
But beware. Although this type of mortgage sounds like a 'free money' deal, lenders do apply certain charges and penalties, such as an Early Redemption Charge with cashback mortgages. Usually a borrower will be tied-in for between five and seven years where a substantial cashback has been paid.
Base Rate Tracked Mortgages
As suggested by its name, this mortgage tracks the base rate.
Unlike a standard variable rate mortgage, where interest rates can be changed at the whim of the lender, this mortgage rate automatically changes when the base rate is altered by the Bank of England.
But, base rate tracker mortgages sometimes only align with the base rate for a limited amount of time - check this out before signing on the dotted line. However, on the upside, with this type of mortgage there are usually very few redemption penalties.
Current Account Mortgages
A current account mortgage is a flexible mortgage that combines your current account and mortgage into one.
Every penny you have in your current account is off-set against your mortgage, thus reducing your mortgage balance and saving on interest costs. For instance, on a particular day a borrower has a mortgage balance of £60,000 and has £3,000 held in his current account. The customer is then charged mortgage interest on £57,000 - the mortgage balance minus the positive balance held in the current account.
This is a very effective way of reducing your mortgage interest charges as it makes all of your money work for you.
For a borrower wanting a one-stop-shop for all their finances this is an attractive option.
However, the main problem with this mortgage is that it can be very difficult to work out whether or not you are better off applying for a an attractive discounted mortgage or taking a CAM - some say that you need the IQ of a rocket scientist to work that out.
Discounted Mortgages
A discounted mortgage is one which has a reduced introductory rate fixed for a set period, normally either 6 months or a 12 months.
This type of mortgage will help you with other expenses that you incur when you first buy a property, such as furniture and moving costs and so are popular with first time buyers.
After the initial introductory period, the rate will rise and your repayments will increase. To ensure that you don't switch mortgages after the discounted period ends, lenders generally charge a repayment penalty of three or four months interest if you repay your mortgage during the discounted period (i.e. get a new loan from someone else) or within a certain period after the discounted period ends.
Fixed Rate Mortgages
A fixed rate mortgage offers borrowers a guarantee of what their mortgage repayments will be, set over a certain period of time. On the upside this allows those with a mortgage to budget for their mortgage payments. On the downside, you run the risk of mortgage rates falling below the level at which you've agreed your fixed rate deal - and this usually happens.
In the UK, most fixed mortgage rates are set for between one and ten years. Be aware that fixed rate deals often involve the borrower agreeing to a penalty charge if they decide to cash their mortgage in early. This charge often amounts up to six months interest.
Flexible Mortgages
This type of mortgage usually allows a certain amount of payment flexibility - i.e. you can change your mortgage repayments to suit changing monthly needs.
Borrowers can pay more than the required amount (either on top of your regular monthly mortgage repayment or as an additional lump sum), pay less than the required amount or take a payment holiday at any time without penalty.
Also, mortgage holders can also borrow back overpayments to use for other purposes - a definite bonus for those months of heavy spending such as Christmas time.
One of the biggest bonuses with most flexible mortgages is that, unlike other mortgage types, they accumulate interest daily meaning that you save on interest from the day you put money into your mortgage account. Please note however, that this is not the case with all flexible mortgages - be sure to check out the terms before you commit.
Variable Mortgages
This type of mortgage usually allows a certain amount of payment flexibility - i.e. you can change your mortgage repayments to suit changing monthly needs.
Borrowers can pay more than the required amount (either on top of your regular monthly mortgage repayment or as an additional lump sum), pay less than the required amount or take a payment holiday at any time without penalty.
Also, mortgage holders can also borrow back overpayments to use for other purposes - a definite bonus for those months of heavy spending such as Christmas time.
One of the biggest bonuses with most flexible mortgages is that, unlike other mortgage types, they accumulate interest daily meaning that you save on interest from the day you put money into your mortgage account. Please note however, that this is not the case with all flexible mortgages - be sure to check out the terms before you commit.