How do mortgages work?
When you're looking to buy a property or remortgage the question of 'how do mortgages work?' is truly relevant. If you need some impartial and reliable advice on this question and anything else to do with mortgages, come and speak to Dolphin Mortgage Advice Ltd in Reading.
How we can help you
There are 3 main types of mortgage - repayment, interest only and part & part
Repayment mortgage(also known as capital and interest)
This is probably the safest and easiest way to repay your mortgage because as long as you make all monthly payments in full and on time you are guaranteed to repay the capital and the interest by the end of the term. Your monthly payments are made up of part capital and part interest. During the earlier years, your payments are mostly interest and it is towards the latter years that you pay off more of the capital.
It may be important to consider a separate life assurance policy designed to pay off your mortgage should you or a partner die.
Interest only mortgage
This is where you pay the lender the interest only part on the amount you have borrowed. It is your responsibility to ensure sufficient funds are available at the end of the mortgage term and you may need to consider investing in a separate investment vehicle with the aim of repaying the loan. However, the value of an investment can go down as well as up and you may not get back the full amount invested. Depending on how your investment does, you may be able to pay off your mortgage early, or find that there is a shortfall that you have to make up.
It may be important to consider a separate life assurance policy designed to pay off your mortgage should you or a partner die. Depending on your circumstances, a level term may be something to consider for an interest only mortgage, as the cover remains the same throughout the term of the mortgage.
Part & part
Some lenders may do a part and part mortgage whereby you can opt to have a set amount on a repayment basis and the rest on interest only.
Interest types:
Fixed Rate - To help you budget
Makes it easier to plan your finances as payments are fixed for a certain period of time that suits you. Gives you security, as you won’t need to worry if interest rates go up, as it will not affect your monthly payments.
Discounted Rate - Lower monthly payments initially
The lender allows you a discount of a certain percentage off their standard variable rate for a set period of time. The level of discount offered may vary depending on the percentage the mortgage represents to the value of your property. If the standard variable rate changes, so too will your monthly payments, but the percentage discount is usually guaranteed for the set period of time.
Base Rate Tracker
This product tracks the Bank of England base rate. Your monthly payment will be affected if there are any changes to this rate. Typically, the lender will have a rate, which is a certain percentage above the Bank of England base rate. This is usually guaranteed for a given period of time.
This product tracks the Bank of England base rate. Your monthly payment will be affected if there are any changes to this rate. Typically, the lender will have a rate, which is a certain percentage above the Bank of England base rate. This is usually guaranteed for a given period of time.
Capped Rate
The lender puts an upper limit on your rate. This means that while you can benefit from a lower monthly payment when rates are low, you have also got the added security that your payments will not go over a certain amount should the interest rates keep going up.
Flexible Rate
Will allow you to make over-payments, underpayments and take payment breaks.
Cashback
A lump sum cashback, may be given by the lender upon completion of the mortgage. If the mortgage is redeemed early however, you may have to pay back some or all of the cashback received - this is known as an early repayment charge.
