Navigating your way through the mortgage market may seem an overwhelming and intimidating process, especially given the abundance of available mortgages and mortgage providers.
However, finding the right mortgage means finding a mortgage tailored to meet your needs, taking into consideration your lifestyle, age and financial situation.
Nevertheless, even after taking these factors into account, you will almost certainly be faced with an enormous variety of mortgages and differing interest rates. There are two major types of mortgage available on today’s market:
1. Capital & Interest / Repayment
2. Interest only
A Repayment Mortgage is structured so that the monthly mortgage payment to the lender, comprising partly of capital amount you have borrowed and partly of interest. This means that each month you’re paying off a small part of your mortgage originally borrowed.
The advantages: You can see your mortgage getting smaller and provided you maintain the required payments, you also have the certainty your mortgage will be repaid at the end of the term.
The disadvantages: At the start, most of your payments go towards the interest on your mortgage. So in the early years, the amount you owe won’t reduce by very much.
Points to Note: A Repayment Mortgage is clear-cut and uncomplicated. It is a sure-fire way of repaying the loan, provided that you make all your monthly payments. The total amount owed decreases as time goes on.
These mortgages are now rare and only offered with very strict lending criteria and are not available to everyone. Interest Only, as the name would suggest, you pay only interest to the lender each month and the original loan amount remains the same over the term.
Therefore, suitable investments are required in order to repay the loan at the end of the term. You’ll need to have a feasible repayment strategy, for example investments and/or savings plans, typically includes Pensions, Endowment and ISAs. This is done by a monthly contribution towards an appropriate investment plans and/or savings vehicle(s), e.g. ISA or pension, which is designed to produce a lump sum, or in some cases with Buy to Let Mortgages, sale of the property. Lenders will want to see proof of these and agree your repayment vehicle(s).
The advantages: If the savings and/or investment plans you choose performs well, then you could pay off your mortgage earlier than planned or if the property goes up in value, you may have a surplus after repaying the mortgage.
The disadvantages: Investments or savings plans are not guaranteed. House price growth is not guaranteed either. If your savings and/or investment plans do not cover the mortgage outstanding. you’ll be responsible for paying the difference. Your mortgage lender can demand repayment, and they’ll charge you interest on any outstanding balance until it’s repaid. You should discuss the risks with your adviser and make sure you’re comfortable with them.
Points to Note: Investments are not guaranteed. You must appreciate the risk involved with the Interest Only.