When you choose a mortgage scheme, it is vital that you take some time to understand the difference between the options available to you and the risks and benefits each pose.

Read on for a short explanation about each type of mortgage scheme available, or click here to contact an adviser at Cheltenham Mortgages for further advice.

Variable Rates

The monthly payment fluctuates in line with the lenders mortgage rate. This can cause budgeting problems in times of increasing interest rates. Some lenders offer an annual review so that the amount you pay only changes once a year with the difference adjusting your outstanding mortgage.

Lenders may also offer a version where your monthly payment fluctuates in line with the Bank of England Base Rate often referred to as a ‘Base Rate Tracker’.

Fixed Rate

The monthly payment is fixed over an agreed period of time and will remain the same regardless of whether interest rates rise or fall.

At the end of the fixed rate term the interest rate usually reverts to the lenders standard variable rate or you may be offered the choice of another product, on the terms available at the time.

Discounted

The lender offers a true initial discount on their normal standard variable rate for a given period.

At the end of the discounted period, the rate reverts to the lender’s standard variable rate. No interest is deferred so the outstanding mortgage will not increase.

Capped Rate

The interest rate is guaranteed not to go above a certain level throughout the capped rate period, which can be from one to ten years, but you will benefit from any reduction in interest rates

Flexible Mortgages

These schemes allow you to overpay, underpay or even take a payment holiday.

Additional Points to note:
Any unpaid interest will be added to the outstanding mortgage. Any overpayment will reduce your outstanding mortgage. Some have the facility to draw down additional funds to a pre-agreed limit.

Early Repayment Charge:
Lenders that offer any type of fixed rate, discount or cashback facilities to attract custom, usually require the mortgage to stay with them for a period of time to recoup their costs. They do this by imposing an early repayment charge for a given period, which can extend beyond the benefit period. They will usually make an early repayment charge if you want to redeem your mortgage early.
Early repayment charges will be charged if you die within the redemption period so you should consider building this in to the level of life cover you have. You should also make sure that you can afford the standard variable rate that will be charged at the end of the discounted or fixed-rate period.

Cashback

Some lenders offer cash payment on completion of the loan, either based on a percentage of the total loan or a flat amount. In some cases, if the loan is redeemed early, a proportion of the cashback may have to be repaid to the lender.

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