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Published on April 5th, 2013 | by P2P Lending Advice

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What types of mortgage are available?

Buying a property is the single biggest capital investment most people will ever make. To buy your own home you will need a substantial amount of money – more than most people have available. Most potential buyers therefore need to secure financing from a bank or other lending institution, who all offer different types of mortgages. In general, the differences between mortgage products are in how interest rates are applied, how long the loan is for and how the loan is repaid:

  • Fixed interest rate. The rates will stay the same for the entire loan so you know exactly how much your interest will be over a given time. But rates tend to be higher to give you this security.
  • Variable interest rate. The rates will fluctuate in relation to the base rate set by The Bank of England. You can typically get a lower interest rate.

Both will be for set terms. The longer term you set the lower your interest rate will be BUT the more expensive the loan will be to repay in the long term as there is more time for the interest to compound. In addition, mortgages will either be open or closed. Open is where you can make repayments on the bulk of your loan, which will then reduce your interest charged, or renegotiate or refinance the loan at any time. Closed is where you pay off your interest only at set amounts at set times. There will be penalties for early repayment or refinancing. Generally the more flexibility, or the less risk, you build into your mortgage package the higher your interest rate will be. And the more standard, or the more risk, the lower your interest rate will be. Every lending institution will offer versions of fixed and variable mortgages on either open or closed terms so you will need to shop around for one that suits you. If you need any more information please contact us.

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