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Following is some general information relating to mortgages that you may find helpful.
Types of Mortgage
Basically there are two types of mortgage - repayment or interest-only. Within these two options interest rates can be fixed or variable.
Repayment: Over the term of the mortgage, the capital and interest is repaid, therefore on completion of the mortgage no money is owed to the lender.
Interest Only: As the name implies, with this mortgage throughout the term only interest is paid to the lender, therefore on completion of the mortgage the capital is still outstanding. An investment vehicle is needed to repay the capital. i.e. endowment, pension or ISA.
Endowment mortgages are amongst the most popular ways of repaying an interest only mortgage. An endowment policy is a savings plan that runs for the same term as a mortgage, and on maturity the endowment should repay the loan.
With a pension mortgage the tax free lump sum payable on maturity of a pension policy, is used to repay the capital amount outstanding on a mortgage.
ISA's provide a relatively new type of investment based on a unit trust savings plan which pays out a tax free amount at the end of the term. The Government has said that these will run for at least ten years.
Glossary of terms
Capped Rate: A mixture of fixed and variable rate. The lender will cap the mortgage at an agreed rate, if interest rates remain above this rate, you will be charged the capped rate, if rates drop below the capped rate, your rate will also drop. Again similar to fixed rates, there may also be a redemption period.
Cashback: The lender will, either on completion of the mortgage or shortly afterwards, give you a cash sum. This is generally a percentage of the mortgage i.e. 3%. Cashback mortgages can be linked to discounted, fixed or capped rates.
Compulsory Insurance: Some lenders offer preferential rates if you will take their insurance. It can be buildings, or buildings and contents, and sometimes unemployment insurance may be available also.
Discounted Rate: A discount is given off the lenders variable rate for a certain period, i.e. 2 years. Therefore whether interest rates rise or fall, you will be charged a rate less the discount. A redemption period may also apply.
Fees: An arrangement, booking or completion fee may be charged by your lender. Some may charge them on application, others on completion.
Fixed Rate: The interest rate is fixed for a period of time, i.e. 5 years. Whether interest rates fall or rise, with a fixed rate the payment would remain the same. Often lenders will at the end of a fixed rate, tie you to the lender for a further period, known as the redemption period.
Flexible: A relatively new concept in mortgages. As the name implies the mortgage is a lot more flexible than traditional mortgages. It allows you to not make a mortgage payment for a month or two, to "borrow back" any overpayment at any time for any purpose, repay all or part of your loan at anytime without penalty and the interest is calculated on a daily basis on your outstanding mortgage loan (i.e. overpayments credited to your mortgage immediately resulting in huge savings).
Mortgage Indemnity Premium: Only applicable on loans 75% of the purchase price/value or above. This is an insurance the lender takes out against you defaulting on your mortgage. The premium can usually be added to the mortgage, in which case you will be paying interest on it for however long you have the mortgage. Alternatively, many lenders give you the option to pay the premium in twelve monthly instalments during the first year, or the premium could be paid off in a lump sum at the start of the mortgage. Some lenders do not now charge you an indemnity premium, instead electing to pay the premium themselves.
Redemption Penalty: This is a charge made by the lender payable if you pay off your mortgage before a certain time. This penalty can be expressed in a number of ways, either as a percentage of the redeemed mortgage, or as a set penalty i.e. 6 times you monthly mortgage payment. The penalty period can be the same as the fixed or capped term that was initially taken. The more competitive the mortgage interest rate, the longer the penalty period.
Valuation Fee: A fee charged by the lender for valuing the property, sometimes called a survey fee. There are 3 different types of valuation - basic mortgage valuation, homebuyers report or full structural survey.
Variable Rate: A rate that rises and falls in line with the changes made by the lender.
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