Help for First Time Buyers

Four Different Ways of Repaying Your Mortgage - April 2008

When you're taking your first steps into the world of property, then mortgages can often be a confusing topic. Effectively, a mortgage is a loan that uses a property as collateral. What that means is if you default or fail to repay your mortgage, then the lender maintains the right to repossess your home and then auction it off in order to recoup the lost money. While this definition of what a mortgage is seems relatively simple, there are literally thousands of mortgages products across the market, and many different rates and repayment methods. Here's a quick explanation of some of the different types of repayment methods available.

Standard Variable Rate

If you take out a variable rate mortgage, then your payments will go up or down with the lender's interest rate. Lenders often change their rates if there is any change in the base rate as set by the Bank of England, but this is not necessarily always the case. When you take out a mortgage, make sure you check what the base rate is. This can easily be done on the Bank of England's website. If it goes down in a month then that's a good thing – you'll be paying less!

Tracker

This is very similar to a standard variable rate, but the interest rate will always change if there is any change in the Bank of England's base rate. Natwest's 2-year tracker mortgages, for instance, guarantee to be 0.24% above the Bank of England's base rate for the term.

Fixed Rate

As the name suggests, this type of mortgage means you will repay at a fixed rate for a set period. Therefore, you'll know exactly how much you'll be paying each month during that period. Fixed rate deals are normally only available for a limited period, before you switch onto the lender's variable rate. They're particularly good to take out during a period of low interest rates if it seems likely the Bank of England's base rate is going to increase.

Capped or Cap and Collar

A capped rate means you'll pay a variable rate of interest rate, but there is a ceiling on your payments so they won't go above a set amount for a set amount of time. Some of these deals also include a collar, which is the lowest rate that you can repay. So if interest rates drop quickly, you may lose out with this type of product, although you could profit if rates go up dramatically.

If you're looking for a new home, or hunting for property, then take a look at Fish4 Homes. This website has a huge directory of property to look at, with a useful filtering system that will make your search quick and easy.

If you're looking for a sound investment or just a great way to save, then take a look at Alliance and Leicester's ISA. Time is running out for you to get this year's allowance!