MORTGAGES
It is helpful
to consider your mortgage
from two aspects: the amount that you borrow (the capital), and the amount
that it costs (the interest), usually paid monthly. The most suitable
loan package depends on your circumstances.
The two basic
types of mortgage are:
- Capital
and Interest Repayment Mortgage
As well as interest payments being made, the mortgage loan amount is
gradually paid off year by year throughout the term of the mortgage.
At the end of the term nothing remains owing to the lender.
- Interest
Only Mortgage
Only interest payments are made throughout the term of the loan, with
the original mortgage loan amount remaining payable at the end of the
term.
Usually an investment (savings) plan that pays out a lump sum in later
years is used to repay the mortgage loan amount remaining at the end
of the term.
Interest
Rate:
This is
the true cost of borrowing. Consequently, you should ensure that the type
of interest rate package suits your financial circumstances now and in
the early years of the loan.
The basic
types of interest rate package are:
Fixed
Here the rate is guaranteed to stay fixed for a specified period, after
which it can be expected to revert to the lender's normal standard variable
rate, or you may have the option to transfer to a new fixed rate.
Standard
Variable Rate
This is the traditional type of mortgage interest rate, which is set by
the lender and fluctuates from time to time. It may be loosely based on
the base rate, but will not always move at the same time.
Discounted
Rate
This is a discount to the lender's standard variable base rate, lasting
for a guaranteed period of time. It will vary in that period with any
change in the standard variable rate, and will revert to standard variable
rate at the end of the period.
Capped
Rate
This is a form of variable rate where the rate is capped at a specified
level over a specified period of time i.e. it is guaranteed not to exceed
the capped rate during the period. The rate may fall during the period,
and at the end of the period will revert to the lender's standard variable
rate at that time.
Deferred
Interest
The interest payments in the early years are either totally or partially
deferred. The amount deferred is added to the capital increasing the size
of your mortgage.
LIBOR
Linked Interest
The interest rate is a fixed amount above LIBOR. LIBOR is the London Inter-Bank
Offered Rate. This is the rate at which banks notionally buy and sell
money to each other. It varies from day to day and is closely linked to
Base Rate.
Repayment
Methods:
If you choose
a capital repayment loan then you pay your loan down directly.
If you choose
the interest only method, then there are several different methods of
repaying the mortgage. The right selection depends on your particular
circumstances. The basic types are laid out below.
Endowment
A form of savings based life assurance policy frequently used to repay
home loans. The most common form is a low-cost
endowment.
ISA
(Individual Savings Account)
This has taken over from the Personal
Equity Plan (PEP) as the current tax shelter for pooled investments
such as unit
trusts, which invest in the stock market.
Pension
In this case you can set up a pension along side your mortgage loan. The
pension contributions will obtain tax relief. At the end of the term the
capital will be repaid from the tax-free cash sum that can be taken from
a pension fund at maturity.
>> Click here to get advice
|
s
