Mortgages

Types of Mortgage

Fixed Mortgage v Adjustable Rate Mortgage (Variable Rate Mortgage)

This is essentially a gamble, requiring you to look into the future. Do you think interest rates will rise or fall? Over what period? The lenders have already made their guesses as reflected by the deals on offer, but interest rate movements are truly unpredictable. The further into the future you look, the more unpredictable they become. For cautious people fixed rates do offer the advantage of certainty, but you may suffer the frustration of being fixed into a higher rate when generally interest is falling. Reading the financial press may provide some insight, but frankly, given the term of most mortgages runs into decades, the best advice is to listen to your heart and follow your gut feeling.

A variant of the fixed v adjustable dichotomy is the capped mortgage. These fix a maximum rate for their duration, but allow you to benefit from any rate falls. A cap and collar mortgage keeps rates within a band - not exceeding the cap but not falling below the collar.

Trackers are linked to some external index, eg central bank rate, thus provide protection from arbitrary decisions by the lender

A flexible/offset mortgage links the mortgage with cheque and savings accounts and credit card. Savings are used to reduce outstanding debt, whereas credit card borrowing takes place at the substantially lower mortgage rate. The mortgage interest rate can be higher than more "traditional" mortgages.

Arrangement Fees

There will usually be an "arrangement fee" (equivalent "points" in the US) payable for special rate deals. Often the lender will offer to add this to the loan so it isn't always noticeable upfront, though in this case it will be liable for interest and end up costing considerably more than the quoted figure.

Watch out also for exit fees, these may apply to early repayments, or simply at the natural termination of the mortgage.

Is it worth paying an arrangement fee for a special deal? This depends on:

• How much you are borrowing (the more you borrow, the more likely a special deal is to be beneficial).

• How long the discounted rate applies for.
• What happens upon expiration of the discount rate?

What fees apply in order to move the mortgage following expiration of the discount rate?