Mortgages can be a confusing topic. With so many different mortgage options available, choosing the right one can be a daunting task. This is especially true if this is your first attempt at getting on the property ladder.
A mortgage will probably be the biggest financial commitment that you will ever undertake; it’s therefore essential that you familiarize yourself with the basics. Being ill prepared could prove costly if you make a wrong decision.
The best thing you can do, before making any financial commitment, is to seek advice from an independent financial advisor. But in the meantime, it’s useful to know a little about the mortgage types on offer.
Types of Mortgages
There are basically two types of mortgage:
• Repayment (capital and interest mortgage)
• Interest only (ISA, pension or endowment mortgage)
What is a repayment / capital repayment mortgage?
Repayment
mortgages are an agreement whereby each monthly payment covers the capital amount as well as the accrued interest.
Advantages of a repayment mortgage
• Lump sum payments can be made into your mortgage account, reducing both the capital sum and the interest amount payable.
• Life insurance cover is not always necessary when taking out this type of mortgage.
• It is a very flexible option, with the facilities to increase your monthly repayments or to even make one-off payments.
Disadvantages of a repayment mortgage
• You may incur financial penalties for making lump sum payments into your mortgage account. This is due to the early payments on the mortgage covering mainly the interest rather than the capital. For borrowers who move property frequently, this can result in only a small amount of the capital being paid off.
• If you have no life insurance cover and you die while the loan is ongoing, then the debt will still have to be repaid. This may result in the property having to be sold to repay the outstanding debt.
Please see ‘A Guide to
Mortgages
– Part 2’ for information on interest-only mortgage options.
