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Mortgages FAQs

What is a mortgage?

A mortgage is a means by which a "borrower" receives a loan from a "lender", normally a building society or bank, in order to purchase a property. The loan is repaid over a set number of years (often 25 years but this might vary) in monthly instalments. The purchased property acts as security for the loan. If the purchaser fails to make their repayments, then the lender would be entitled to repossess the property.

What is the rate of Interest?

The rate of interest is an amount of money, included in your monthly mortgage repayments, giving the lender a financial return on their loan.

What will the interest rate be on my mortgage?

Over the course of your mortgage, the interest rate you will pay on your loan will vary. This means your monthly repayments will also vary. It is important to allow for this when calculating the amount you can afford to borrow. Amongst other factors, the rate of interest is affected by the performance of the economy and therefore difficult to predict. For this reason, lenders have introduced a number of different schemes, some of which offer some guarantees to the amount of interest you will pay.

What is a flexible mortgage?

A flexible mortgage allows you to make additional or lump sum payments in excess of your scheduled amount, enabling you to pay off your mortgage early. By reducing the capital amount of your mortgage in this way, you are also reducing your monthly interest payments. You may take this money back at any stage or use it to take a repayment "holiday".

What is the difference between fixed, discounted, capped, and variable interest rate mortgages?

Variable interest rate mortgages.

The interest rate on your mortgage will vary, unrestricted, up and down over the period of your loan dependant on the performance of the economy.

Fixed interest rate mortgages.

The lender will guarantee you a set rate of interest on your loan, normally for a specified number of years. Once this period has expired, your interest rate will revert to the normal variable interest rate.

Capped interest rate mortgages.

The lender will guarantee that your rate of interest will not rise above a set interest rate. However, if the normal interest rates fall, the rate of interest, the lender charges you, may also fall.

Discounted interest rate mortgages.

The lender can guarantee a discounted amount of anything, but normally up to five per cent, off your interest rate. This means the interest you pay will still vary up or down but at a lower rate than the general interest rate. Normally, this is for a set number of years. Once this period has expired, your mortgage will revert to the normal variable interest rate.

What are the different ways you can repay a mortgage?

Repayment Mortgages

This is a straight forward loan. Each month you make repayments to the lender. These repayments will be made up of an amount to pay off the capital of the loan and an amount to pay for the interest charged on the total of the loan.

Endowment Mortgages

Your monthly repayments on an endowment mortgage are split two ways. One part of your payment goes to your lender and the other goes to an investment fund (normally managed by another company). Your monthly repayment to your lender only pays off the interest charged on your mortgage, not any of the capital. This means, that at the end of the period of your mortgage, you still owe the mortgage company the same amount as you initially borrowed. Your monthly payment to the investment fund, normally linked to units, builds up an amount, which will be used to pay off your mortgage at the end of the term. The amount of money returned from your investment fund depends on how your policy has performed over the years. There is no guarantee that there will be enough to pay off your mortgage. However, they are designed so that you may actually receive a cash lump sum in addition to being able to repay your mortgage, or you may be able to repay your mortgage early, saving you interest payments.

ISA Mortgages

ISA stands for Individual Savings Account. These are schemes which allow individuals to invest in shares and bonds up to a certain amount without paying tax on the profits. An ISA mortgage works in the same way as an endowment mortgage, see above. The main difference between the two, is that your investment fund is based purely on shares and bonds rather than units.

Pension Mortgages

When you retire, you are currently allowed to take a proportion of your pension as a tax free sum. A pension mortgage works in the same way a as pep or endowment mortgage (see above). The difference between them, is that a pension mortgage is linked to your pension, using this tax free sum to pay off your mortgage. This mortgage enables you to take advantage of the pension tax benefits.

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