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Guide to Mortgage Products

Richard Pettinger

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There are many mortgages on the market. Finding the most suitable mortgage can be a little confusing. These are some of the main differences between the types of mortgages.

Fixed vs Variable Mortgage

The first choice for mortgages is between fixed and variable mortgages. A variable mortgage will depend on the interest rate set by the Central Bank - Federal Reserve or Bank of England. Therefore, mortgage interest payments can be volatile; if interest rates rise, the cost of your mortgage will increase. A fixed rate by contrast gives you a guaranteed monthly payment for 2,5,10 or 20 years. Despite the advantage of fixed rates, many still choose variable mortgage because they are initially cheaper or people think interest rates will go down. It is a matter of personal choice, however, if you are on a tight budget then a fixed rate makes a good choice because you can budget and avoid the risk of being unable to pay your mortgage.

Flexible Mortgage

Many standard mortgage products have strict criteria for making repayments; however increasingly mortgage products offer flexibility in making repayments. The advantage of flexible mortgages is that it enables you to make overpayments and help reduce the total cost of your mortgage. Similarly in other months you can take advantage of overpayments to have a payment holiday. Flexible mortgages are particularly good for the self-employed. The important thing is that they require a bit of self discipline to make sure you do make the overpayments were necessary.

Current Account Mortgages

Current account mortgages are becoming increasingly sought after. They are an efficient way to make use of any savings in your current account. Current accounts are sometimes known as offset mortgages because savings are automatically used to reduce the mortgage debt, thereby saving you mortgage payments. Current account mortgages also save tax payments on current account interest. There is a usually a small premium for taking out a current account mortgage, but, if you have any significant level of savings a current account mortgage is highly desirable.

Interest Only Mortgages

For many first time buyers, the difficulty of getting on the property ladder has meant they have turned to products such as interest only mortgages. Lenders have recently tightened lending criteria and so interest only mortgages have become less popular. However, any interest only mortgage should have an alternative investment plan to pay off the mortgage capital. An interest only mortgage gives lower monthly payments, but, without an effective scheme to pay off the debt they can be dangerous.

Self Certification Mortgages

Designed for people who have difficulty proving their income, self certification mortgages have also been misused by people seeking to borrow bigger amounts than they can really afford.

Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He updates a blog on Mortgages and the Housing Market

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