Other Types of Mortgages

Fixed interest mortgage The interest rate is fixed for a specified period - say, one, three or five years - when you first take out the loan. After that, the rate becomes variable. There's a penalty charge if you want to switch your mortgage within the fixed interest period. These mortgages are a gamble: if interest rates rise during the fixed interest period, you'll be paying less than with an 'ordinary' mortgage. But if interest rates fall, you'll be stuck paying more.

LIBOR-linked mortgages The interest rate is set at a fixed percentage (one per cent, say) above the three-month London Inter-Bank Offered Rate (LIBOR - the rate at which banks lend to each other). Again, this type of mortgage is a gamble: sometimes you'll be paying more than you would with an 'ordinary' mortgage, sometimes less.

Interest-only mortgages You pay interest only and don't repay the loan until the mortgage ends. Some lenders will lend this way without requiring you to take out an endowment policy or pension plan, and there may be no set mortgage term. Most commonly, this type of mortgage is used with older (40-plus or retired) borrowers, and the loan is repaid from the proceeds of the sale of the home when you move or after you've died. Monthly repayments are lower than for an 'ordinary' mortgage.

Low-start mortgages You pay a lower than normal interest rate, or make interest-only payments, for the first three years, say - though schemes vary. You pay a higher than normal interest rate once the low-start period is over. Useful if you expect your earnings to rise, or if you expect to move again within the low-start period - though watch out for early redemption charges ).

Executive or high-earner mortgages You may be able to borrow a higher than normal mulTIP - le of your salary, and some lenders let you put off paying part of the interest for a time in a similar way to a low-start scheme (see above). Available to high-flyers whose future career looks promising despite only modest earnings at present.

Larger-than-average mortgages Lenders vary in their treatment of large loans. Some charge a lower rate of interest than on smaller loans if you're borrowing, say, more than £60,000. Other lenders charge more for larger loans - so shop around.

`PEP-linked' mortgages Your monthly payments comprise interest only, and you also invest in a Personal Equity Plan (PEP - see p. which is used eventually to pay off the mortgage. PEPs are a tax-efficient form of investment because there's no income or capital gains tax to pay on the proceeds. But this type of mortgage is more risky than traditional repayment and low-cost endowment mortgages.


Read more about Basic Rules

Unit Trust Mortgages

How they work These are fairly new and in some ways similar to unit-linked low-cost endowment mortgages ). You don't link your mortgage to an insurance policy; instead you invest in a unit trust which is cashed in at the end of the mortgage term and used to repay the loan. During the mortgage term, your monthly payments are used to pay the interest on the mortgage.

Points to note Unit trust mortgages (like unit-linked endowment mortgages) are more risky than a normal endowment mortgage or a repayment mortgage because the price of your units in the unit trust can fall as well as rise.... see: Unit Trust Mortgages


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