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Repaying your Mortgage

You need to know the options you have to repay what is probably going to be the biggest debt you'll ever have!

There are two main options ... a repayment mortgage, or an interest only mortgage. It may be possible to combine the two.

Here's how they work.

Repayment Mortgage

A repayment mortgage works in the same way as most types of loans. You make a regular monthly payment to the lender, and the payment is made up from capital (i.e. repaying the money you've borrowed) and interest. So, providing you keep up the appropriate payments, at the end of the term you will have repaid the loan in full.

Interest Only Mortgage

With an interest only mortgage, you pay only the interest to your lender. This means you need to make a separate payment into some sort of savings plan, so you can build a lump sum to pay off the mortgage at the end of the term.

The three main types of savings plans are - ISA's pension plans and endowment policies.

Whichever savings plan you choose, it is vital you keep up the contributions and also make sure your policy is regularly reviewed to ensure it is on target to repay the mortgage at the end of the term. It is important to remember that these types of investment are long term commitments and are unsuitable for people who might not be able to maintain their payments until the end of the term.

'Part and Part' Mortgage

As mentioned, some lenders may allow you to combine both repayment methods.

For example, if you took out an interest only mortgage for your first home for £150,000 and you are looking at purchasing your second home at a cost of £250,000, you may want to keep your existing savings plan arrangements until the policy matures but borrow the additional £100,000 as a repayment mortgage.

Your 'attitude to risk' with regard to borrowing will obviously affect how comfortable you are with the interest-only approach or the repayment method

A Bit About Rates

Paying the Interest on your Mortgage

You have to pay interest on any debt, and mortgages are no different. They differ only in the range of options offered.

Variable Rate

This means you pay the 'going rate' on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point.

Fixed Rate

The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit. There will be a booking fee to secure the rate too.

Very low rates may tempt you, but they can be used to trap you into paying over the odds at a future date. Check how long you will have to stay with the lender before you can switch without penalty.

Capped Rates

These are fixed, or capped, at an upper level, but if rates fall you get the benefit of paying the lower rate. Such deals can be a good for budgeting as you know what the maximum is likely to be.

Cash-back Deals

This is when lenders offer money back if you take out a particular product. However, nothing comes free in life and cashback mortgages may be weighed down with hefty penalty charges if you later want to switch lender.

Discounted Rates

Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.

Source: BBC Business News 24/04/07

What is a Mortgage? (Basic Definition)

What is a Mortgage?

A mortgage is like any other kind of loan – you borrow money, and you pay it back with interest over a period of time. But it has one key difference: it’s secured against your home. So if for any reason you can’t repay it, the lender can sell your home to recover their money.

Residential mortgages are regulated by the FSA ...

The Financial Services Authority (FSA) - was set up by the government to regulate financial services and protect consumer rights. Because they're the watchdog, all the information they provide is impartial.

The 'Moneymadeclear' section on the FSA website at www.moneymadeclear.fsa.gov.uk provides clear impartial information about financial products and services from the FSA. It aims to help you get a head start with your personal finances.

Check it out!


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