Remortgages
Many UK homeowners are turning to remortgage as an effective way to reduce monthly bills and increase income. However, the British mortgage industry can be somewhat complex, and anyone looking to remortgage a property should be informed of the different types of remortgage that are available.
Fundamentally, a mortgage is a loan borrowed against the value of a property. A bank, building society, credit union or other financial institution lends its client the money to purchase property - to be paid back with interest over a set period of time.
Simply put, a mortgage is a means to the end of buying a home or other property. Accordingly, individuals interested in remortgaging should be focused on paying off the capital and how they pay the interest on it. The schedule of payment and the way the interest is calculated are the main variable factors in different types of remortgage in the UK.
Mortgage Categories
Broadly speaking, mortgages in Britain fall under two meta-categories - repayment mortgages and interest-only mortgages.
Repayment mortgages - these are designed to simultaneously pay off the interest and the capital. In these schemes the majority of the early payments go to the interest, with initially little of the capital being paid off.
Interest-only mortgages - the second major category, these charge only the interest over the period of the mortgage, with the capital to be repaid in full at the end of the mortgage. The underlying concept in such mortgages is that the money not spent on capital payments will be reinvested elsewhere.
The defining quality of either mortgage type is how the rates are figured and paid out:
- Flexible Rate - this type of mortgage permits the borrower to over- or underpay their monthly mortgage fee without penalty. Flexible rate mortgages also allow for early pay-off of the mortgage debt.
- 100% Mortgage - 100% mortgages have the bank lend the borrower a lump sum enough to purchase the property. These mortgages carry a heavy interest burden. Also, unlike than the gradual traditional repayment mortgage, property bought outright with a 100% mortgage can rapidly lose value and put the debtor at a financial loss.
- Variable Rate - variable rate mortgages are the most straightforward, and most mortgages revert to variable rates after their initial period. In them, you pay the going money-market interest rate on the value of your mortgage.
- Fixed Rate - these mortgages set an interest rate payment over a given time. If interest rates rise, the borrower saves. If they fall, the borrower will pay out over the odds.
- Capped Rate - capped rate mortgages set a temporary ceiling above which interest rates cannot rise. If rates are below the cap, the borrower pays the lower rate.
- Discount Rate - discount rate mortgages offer a lowered interest rate for a beginning period of the loan. These often bind the debtor to the lender, and can cost more in the long term.