Interest Only - This is where only the interest on the amount borrowed is paid direct to the Lender for the whole of the agreed term. At the end of the agreed term, the original amount borrowed becomes payable as a single lump sum.
Where an Interest Only mortgage is undertaken, it is necessary to have in place a method of providing the required lump sum of money at the end of the term. Suitable methods of achieving this include Endowment Plans, Individual Savings Accounts, Personal Pension Plans or other Regular Savings Products.
Types of Interest Rate
There are a number of different types of ‘Interest Rates’ which are charged by the Lenders on the capital amount outstanding every month. These are:
Variable Rate - This is where the amount of interest charged can be varied by the Lender at any time throughout the mortgage term. The rate at which it is set is directly related to the amount of interest that the Lender is prepared to pay on its customers’ deposits/savings.
- Advantages - Normally no application or arrangement fee. Rarely has any redemption penalty. Your monthly payments will fall with any reduction of interest rates. Flexibility.
- Disadvantages - Your monthly payments will rise with an increase in interest rates. Does not give your the ability to budget for repayments.
Fixed Rate - This is where the Lender agrees to charge a fixed rate of interest on the amount outstanding for an agreed period. The rate that a Lender will agree to will be dependent upon the term that the rate is to be fixed. The shorter the period the lower the rate that they will agree to set.
- Advantages
- Guaranteed Mortgage repayments for the duration of the fixed rate period. Protection from increases in interest rates. Provides a variety of fixed rate periods from as short as 6 months.
- Disadvantages -
You will not benefit from a reduction in your monthly payments should interest rates fall. Normally carries an early redemption penalty of several months repayments
Discounted Rate
- This is where the Lender agrees to allow the borrower a discount on the Variable Rate for an agreed period of time, following which the borrower will then be charged the variable rate.
- Advantages - Gives a reduced repayment over the period of the discount. Repayments will reduce with interest rate falls.
- Disadvantages - Repayments will rise with interest rates increases. It may require an arrangement fee up front. Normally an early redemption penalty is attached to the offer.
Capped Rate
- This is where the Lender agrees that the borrower will pay the Variable Rate of interest but, that for an agreed period, the Variable Rate increase will be capped at an agreed level, and the borrower will not be charged an interest rate above the agreed limit. At the end of the Capped Rate period the borrower will then be subjected to the Variable Rate.
- Advantages - It gives you a guaranteed rate of interest which cannot be exceeded. If interest rates do fall so will your monthly repayments.
- Disadvantages - Normally an arrangement fee needs to be paid. Generally involves an early redemption penalty of several months’ repayments.
Throughout the process of arranging your mortgage,
Paul will inform you of general costs and fees involved in establishing and maintaining your mortgage. These include Solicitor’s Fees, Survey Fees, Arrangement Fees, Mortgage Indemnity Guarantee Premium (MIG) if applicable, Land Registration Fees and Stamp Duty.
Other things to be aware of:
Building Insurance and Mortgage Protection Policies
Failure to ensure you have in place adequate arrangements to repay the mortgage can result in you losing your home. The responsibility for ensuring these arrangements are in place is yours and not the Lenders. There are a number of Building Insurance and Mortgage Protection Policies available from both the Lender and Independent Intermediaries which meet these requirements. These fall into three main categories:
- Those designed to cover the cost of repair/rebuilding the property. This is normally a Compulsory Insurance required by the Lender.
- Those designed to repay the Mortgage in full at sometime in the future, either in the event of death, critical illness or on obtaining the desired amount achieved through investment of a regular sum of money.
- Those designed to provide for a monthly benefit which would be used to maintain the monthly payments which you are required to meet should you be affected by a period of sickness, accident, unemployment or redundancy.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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