-
Whichever type of mortgage is selected the lender will charge interest,
and there will be an overall cost to the borrower associated with
the loan.
-
Mortgages with fixed rates of interest tend to have larger "up
front" fees than other mortgages.
-
As the mortgage market changes, interest rate packages have gone
through significant changes, for example, fixed rate, "cap"
and "collar", variable, plus combinations to add to the
attraction. It is advisable to clarify any such terms with particular
lenders, as definitions are not necessarily standard.
-
Fixed rates are generally offered for a fixed term and at
the expiry of that term they will usually revert to a variable rate
decided by the lender.
-
Capped rates are those which represent maximum rates which
will be charged by a lender. Therefore, rates may drop below the
'capped' rate but will not exceed it. Rates may be described as
capped for either a part or the whole of the term of the loan.
-
A collar is sometimes used in conjunction with capped rates,
and operates to prevent rates dropping too low, setting a minimum
rate which it will not go below.
-
Interest rates vary from time to time and from lender to lender,
but they normally follow interest rate trends in general. The way
that the interest rate is calculated can vary with the type of lender;
for example, building societies charge interest on the balance of
the loan outstanding at the start of each year, to which is added
the amount due for the next twelve months. Other types of lenders,
such as banks, may calculate interest due on the reducing balance
on a daily basis. Because of the different methods used, it can
be difficult to make a direct comparison between the rates for different
lenders and the only real measure of any accuracy is by the use
of the Annual Percentage Rate (APR) which is an approved method
of calculation and which takes into account the lender's charges,
practices, and the precise circumstances of the loan.
-
A borrower who has a mortgage on variable rates will receive notification
of rate changes, often through a press advertisement. In past years
notification was given individually through the post and some lenders
maintain this practice.
-
Some mortgages are arranged on an Annual Instalment Review basis
which means that a change in interest rates does not necessitate
an immediate change in monthly payment. At an agreed date the repayment
is recalculated considering all changes which have occurred during
the previous year. Thus payments alter once a year and the borrower's
annual budgeting becomes easier.
-
Fixed rates have the advantage of offering effective rate
reductions when general rates rise, and also the ability to plan
budgets because of the fixed cost. The obvious disadvantage would
arise if market rates fell below the payment rate for any significant
period. There could also be a problem when reverting to market rate
if the rate was significantly higher.
-
Variable rates have the advantage of benefiting borrowers
from rate reductions, but with the obvious disadvantage of volatility
of rates over a period and the consequent difficulty in budgeting.
-
Deferred interest loans offer the chance to defer payment
of an element of interest due for an agreed period. The deferred
amount is then added to the outstanding capital, thus increasing
the capital owed. This offers an initial advantage of lower expenditure,
with the linked disadvantage of higher payment at a later stage.
-
Discounted interest loans are similar to the above except
the unpaid interest over the short-term is not added to the outstanding
loan.
-
Flexible mortgages allow a flexible approach to payments
and particularly suit the self employed who may have irregular income.
They allow over payments and payment holidays with interest calculated
daily. Some also provide a cheque book, so that further borrowing,
within pre agreed limits, can occur without the need for a further
application.
-
Cashback mortgages are offered by some lenders who, on completion
of the loan, provide a cash payment to the borrower. The amount
is usually hundreds of pounds. The cost of the cashback is generally
recouped via the interest rate structure and/or early redemption
penalties applying to the mortgage.
- Current account mortgages allow borrowers to link their mortgage
debt with their current account balance. The cash held in the account
is offset against the debt, thus temporarily reducing the debt and
the amount of interest due. There are two principal methods of operating
current account mortgages. One is to hold separate accounts for each
part of the finances e.g. mortgage, saving, cash balance and apply
a separate rate of interest to each part. Alternatively, each element
can be combined in a single account to which one rate of interest
applies.