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First Time Buyers
Mortgages are the largest single transaction in most people's lives. Buying a property can be a stressful and time consuming experience, although nowadays the financing of a mortgage is a case of finding and selecting the most suitable mortgage, rather than simply accepting a lender's offer.
There are few things more exciting than being handed the keys to your very first home. Then once you’ve moved in, there's the fun of deciding where things will go and planning the housewarming party.
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Remortages
There remains two main methods of repaying a mortgage loan, and it is possible to set up the loan on a part interest only and part repayment basis. A description of these methods is provided below.
Repayment (capital and interest) mortgages:
Under a repayment mortgage your monthly repayments consist of both interest and capital, hence, over time the amount of money you actually owe will decrease. In the early years your repayments will be mainly interest and therefore the capital outstanding will reduce slowly in the early years.
Whilst this method ensures that the loan is repaid at the end of the term, it is generally more expensive at the start.
Interest only mortgages:
As their name suggests, with an interest only mortgage you only repay the interest on the loan. At the end of the term the capital is still outstanding. Therefore you will usually need to take out some kind of investment policy to save up enough to repay the loan at the end of the term.
Traditionally the preferred product for repaying the capital of an interest only mortgage was a mortgage endowment policy (which included a set amount of life cover) although more recently customers are using Individual Savings Account's (ISA) and pensions to build up a sufficient sum and taking advantage of the tax breaks offered by these products.
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Jargon
There are also several terms used to describe the interest you pay on a mortgage, and the key terms are as follows:
Standard Variable Rate (SVR)
The SVR is the lenders standard rate, usually 2-4% above the Bank of England Base rate. With a variable rate mortgage you are usually able to switch lenders at any time without being penalized. If you start a mortgage with a different type of interest repayment for an agreed term, once the term finishes you will go back to the SVR.
Fixed Rate
A fixed rate mortgage allows you to repay interest at a fixed rate, irrespective of any base rate fluctuations. In other words your monthly repayments will remain the same every month for a time period agreed between you and your lender (usually between 1 and 25 years). Fixed rate mortgages often have high early repayment charges so you need to be sure this is suitable for you for the foreseeable future. Furthermore, the lender may also charge a 'booking fee' to apply for this type of mortgage.
Tracker
A tracker mortgage will track any movement in the Bank of England Base rate, so you will benefit from any falls in interest rates, but will also have to pay more each month should the rates increase.
Discount
The discount mortgage rate is another variation of the standard variable rate. It provides a discount from the lenders SVR for a fixed period of time. The interest rate still fluctuates, meaning your monthly repayments may differ slightly from month to month, but the discount remains constant.
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