A mortgage is a sum of money borrowed from a bank or a building society in order to purchase a property. The money are paid back over a fixed period of time together with an interest rate. The term of the loan could be between 10 and 25 years and it affects the sum paid every month - the shorter the loan term, the higher the sum. The borrower could repay the capital together with the interest rate (Repayment Only Mortgage) or to pay the interest only and the capital at the end of the loan term (Interest Only Mortgage).The second thing that should be considered is the interest rate options - there are generally six categories:
The lender will insist on adequate insurance to secure the repayment of the loan. This could be a property insurance.The most common forms of insurance in the mortgage industry are the Building Insurance Policy, Content Policy(or combined Building and Content Policy), the Mortgage Payment Protection Plan and the Mortgage Indemnity Guarantee.
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Repayment Only Mortgage -
The sum you have borrowed is known as a "capital". With the Repayment Only Mortgage you pay the capital plus the interest rate. At the end of the loan term the total amount of the debt has been repaid. This is a good mortgage but the main disadvantages are the financial penalties when an overpayment has been made.
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Interest Only Mortgage
The monthly repayments do not pay the capital but only the interest rates. With each payment the borrower takes a suitable investment to repay the capital at the end of the loan term. There are different types of investments (endowment, ISA, Pension Policy), most common of which is the endowment. It's so because it is possible the sum generated at the end of the term to be efficient to pay the capital as well as some extra money to last for the borrower. The disadvantage is that the borrower is liable for any shortfall in the repayment at the end of the term.
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Fixed Rate Mortgages
The amount you repay every month is at a fixed interest rate for a certain period of time, regardless the interest rates at the market. At the end of this period the rate usually converts to Standard Variable Rate.
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Standard Variable Rate Mortgages (SVR)
The interest rate is set in accordance with the bank interest rate. It could increase or decrease over the term of your mortgage. It is usually taken out in conjunction with other offers such as cashbacks.
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Discount Mortgages
The lender offers a discount on the SRV for a term. The discount is fixed while the interest rate may change and this brings uncertaincy in the borrowers budget. If the interest rate increases - the amount of money the borrower should pay increases too, but if it decreases the borrower could benefit from lower payments.
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Capped Mortgages
There is a limit to any increase in the rate for a period of time. If the variable rate drops below the capped rate the borrower will make payment on the lower variable rate. If the rate increases the payment ill not rise over the capped rate.
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Cashback Mortgages
It provides the borrower with an amount of cash at the outset of the mortgage and in return you agree to pay the variable rate charged by the lender for a specified term. The cashback could be a fee or a percentage of the loan - it depends on the lender. Some cashbacks are offered along with discounts or fixed rates or as a benefit. Pure cashbacks are not common.
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Flexible Mortgages
This mortgage provides flexibility in the amount and timing of the repayments. It enables you to make extra payments, pay off your loan before the end of the loan term or make reduce or stop payments when necessary. Usually borrowers have to build up a reserve before being allowed to skip or reduce payments.
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