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A Caveman's Guide To Mortgages

Feb 14, 2008
Nobody in the world is excited by the thought of mortgages. There are about as many live Dodos knocking about as there are mortgage broker s renowned as 'a real party animal.' I make no apologies for saying that what follows is not going to be riveting. Hopefully it will be like the best similar to a comfortable birth - quick, painless and with minimal placenta eating.

What is a mortgage?

In simple terms, a mortgage is a large loan, usually taken out to pay for your house. It is secured against your home, which means the lender may be able to take it away from you should you be unable to meet repayments.

How long does a mortgage last?

A mortgage is generally paid off through monthly payments, usually over a term of 25 years. This term can very depending on the provider however.

How much can I borrow?

When taking out a mortgage, you can traditionally borrow three times your annual income. Your lender may be willing to give you more depending on your circumstances and income.

Is there a deposit?

Almost all lenders ask for some sort of deposit and the more you can put down the better the deal you can be offered. That said, most lenders will offer a mortgage to 95 per cent of the property value, and with some first-time buyers increasingly struggling, some lenders will now go as far as 100 per cent. This does make you more of a risk and a lender is unlikely to hand over large sums of cash without taking precautions or asking for insurance.

How can I repay my mortgage?

There are two ways you can repay your home loan, either through a Repayment Scheme or an Interest Only Scheme.

What is a Repayment Scheme?

With this method you pay back the lump sum you owe and the interest of your mortgage on a monthly basis. This provides certainty of capital repayment and is not Dependant on investment return.

What is an Interest Only Scheme?

With this scheme you pay off the interest on your mortgage, but not the actual lump sum you owe. Meanwhile, you also pay cash into another investment policy, such as an ISA or a pension. You then pay off the mortgage at the end of the term with the money you have built up in the investment policy. When price houses are high, interest only mortgages may be a more affordable option for first time buyers.

What is a variable mortgage?

Under this plan the interest rate will go up and down according to interest rates set by the Bank of England. Lenders usually set their own Standard Variable Rate which goes up and down with the Bank of England base rate.

What is a fixed rate mortgage?

Your monthly payments are fixed at the same rate for a set period of time - usually two years. They do not fluctuate with interest rates and obviously you are gambling on them staying high for the length of the term, otherwise you will miss out on savings.

What is a capped mortgage?

This package offers a variable rate with fixed limitations as to how far the payments can change.

What is a tracker mortgage?

These products simply track the Bank of England base rate. They are usually set above the rate and then move up and down in accordance.
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