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There are basically three standard types of mortgage though these do come in slightly different flavours and packages. Mortgage Lenders may provide introductory offers or combination packages (where you bank, save, borrow and mortgage all with the same financial services provider) but they will all belong to the 3 core mortgage types. A common approach for mortgage lenders is to provide a mortgage which has an initial fixed term, once this term comes to an end the mortgage changes to a variable rate.
Let's look at the three types of mortgage.
A fixed rate mortgage product calculates the monthly mortgage repayment using a fixed APR. This is perfect for if you want to know exactly how much you are going to repay each month. Fixed rate mortgages are typically set higher than the standard variable interest rate that the mortgage company offers. This means that you will pay more than the standard monthly repayments if you had elected to take a variable rate mortgage but, if interest rates rise, your monthly mortgage repayments don't. Fixed rate mortgages are perfect for planning a straight line monthly budget and are consequently the most popular mortgage product.
A variable rate mortgage product calculates the monthly mortgage repayments using a varying APR. The APR is typically linked to the Bank of England Interest rate though set slightly higher so that the mortgage lender can make money above the rate of interest at which they borrow (if they borrow from the Bak of England for example). A variable rate mortgage can be a good deal, particularly when interest rates are low, they are however more risky than fixed rate mortgages. If the Bank of England Interest rate increases, so do your monthly repayments. If there is a sudden sharp increase, it could add hundreds of pounds to your monthly repayments. If you have any concern about varying monthly repayments, you should seriously consider a fixed rate mortgage.
Unlike Fixed rate and variable rate mortgages, the amount you owe never reduces with an interest only mortgage. The Interest only mortgage is typically provided on the understanding that you have a separate financial product that will repay the mortgage at the end of the mortgage agreement. This is normally a savings plan, you may have heard of endowments. In simple terms, you need to prove to the mortgage lender that you will have sufficient funds at the end of the mortgage term to repay the mortgage. Interest only mortgages are less popular than they were a few decades ago, borrowers and lenders now prefer mortgage agreements where the mortgage is constantly being repaid, albeit in small monthly repayments.
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