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Are commercial rates tied to the same rates as residential mortgages and are they as flexible as residential mortgages? Can I pay them off early?
Mortgages are structured in several different ways but the two most important aspects to consider are the interest rate and the repayment schedule for the mortgage.
Most commercial mortgage schemes have variable rates, meaning your interest rate will fluctuate in accordance with any changes in the base rate.
If you would rather have the peace of mind that fixed repayments offer, you can opt for a fixed rate scheme, which means your repayments remain constant for an agreed period of time – mostly two to five years. At the end of the fixed rate period the rate will normally revert to the lender's standard variable rate (SVR).
Lenders also offer capped rate mortgages, where the rate you pay at the outset is normally the provider’s current standard variable rate. This is guaranteed not to rise above a pre-set ceiling, or cap, for an agreed period of time. During this period your rate may decline if interest rates are reduced. Cap and collar mortgages work in a similar way, but if rates fall there is a floor (or collar) below which your rate cannot fall.
With any mortgage, the interest rate you are offered will be based on an assessment of your application, the security you can offer, and your financial position.
There are essentially two methods of repayment:
· Repayment only (capital and interest mortgage)
· Interest only (ISA, pension, endowment or bullet repayment mortgage)
This means your regular repayments are repaying the capital amount you have borrowed, as well as the accrued interest. The amount borrowed therefore decreases throughout the term and this is detailed on your mortgage statement.
This offers a number of advantages, not least the fact that you can be confident that the total amount of the mortgage has been repaid at the end of the term. Overpayments and lump sum payments can also be made into your mortgage account.
With this type of mortgage, only the interest is paid off with each mortgage payment, not the outstanding capital balance. The borrower must also take out an alternative repayment vehicle such as an endowment policy or an ISA, for example.
This is the most common type of interest-only mortgage. It provides life assurance cover and a fixed payment for investment. The fixed payments are based on the amount of the loan together with the mortgage term and are designed so that the amount invested and the earnings are sufficient to repay the mortgage when they mature. But bear in mind that there is no guarantee that the sum on maturity will be sufficient to repay the mortgage.
The Individual Savings Account (ISA) is a tax-free method of saving. This is a complex method of taking out a mortgage so make sure you do your homework and consult an expert before committing.
Some lenders may offer a 'part and part' mortgage where part of the mortgage is repayment only and part of the mortgage is interest only. Which one is right for you will depend on your individual circumstances and plans, so talk to as many lenders as you can before making a decision.
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