Types of mortgage
Finding a mortgage for you
Taking out a mortgage is a pretty big step, whether it’s your first or you’re moving up the property ladder. As the most sizeable loan you’ll ever take out, choosing the right type is essential. The choice, whilst at first glance may seem bewildering, is not as complex as it appears. Essentially, there are two key types of mortgages – repayment and interest only. Once you’ve identified the way in which you want to repay the money lent to you, narrowing down the choice becomes easier. It is simply the case of finding the best deal.
How is mortgage money repaid?
You will pay your mortgage in monthly instalments, but first you need to decide which option will suit your needs, and what you can realistically afford.
|How it works
||You pay some interest and capital off each month, and the capital reduces over time. The loan duration is usually 25 years.
||All you pay the lender each month is the interest on the amount borrowed. At the end of the term you will need enough funds to pay back the amount borrowed. It is usually recommended that you make a separate payment each month on top of your mortgage repayments into a savings scheme to build up the sum needed to pay off the mortgage at the end of the term.
||There are no hidden surprises. At the end of the term, providing you've kept up with repayments, you're guaranteed to pay off your mortgage. You can choose how the interest is added to your loan, see 'know your rates'.
|| Your monthly payment is lower than repayment mortgages. Your investments may perform well, giving you surplus cash after paying off your mortgage. You can choose how the interest is added to your loan, see 'know your rates.'
||Your monthly payment will generally be higher than interest only. There's no potential investment windfall at the end.
||You are relying on your investments to perform well. It is up to you to check whether there is going to be enough to pay off the capital amount at the end. There are no guarantees that you will have enough to pay off your mortgage at the end of the term.
Flexible mortgage - a repayment mortgage with a difference!
Flexible mortgages allow you to increase, decrease or take a temporary payment holiday if financial difficulties arise.
Essentially, flexible mortgages fall under the repayment umbrella. If you were rewarded with a bonus, had a share scheme windfall or had fewer financial outgoings in some months, you could pay off lump sums, gradually chipping away at your mortgage. If disciplined, you could shave years off the length of your mortgage term and save a small fortune in interest payments. Even an extra £50 a month soon adds up.
But if money gets tight, for instance due to loss of earnings, you can reduce, or temporarily stop payments. To do this, you will usually need to have made some overpayments.
An offset mortgage is another way to reduce the overall cost of your mortgage.
With an offset mortgage you take out both your mortgage and a savings account, or even your current account, from the same company. Instead of paying you interest on your savings the amount is used to offset your mortgage loan each time the interest is calculated.
This can significantly reduce the amount you pay over the term of your mortgage; however, as with a flexible mortgage discipline is needed to keep saving.
Know your rates
Your home may be repossessed if you do not keep up repayments on your mortgage.