The concept behind a mortgage is relatively straightforward, you borrow money in order to buy a house and then pay interest on the loan over a prolonged period until you have paid firstly all the interest, and then the loan itself and ultimately end up in ownership of the house. Unfortunately, things aren’t always that simple, the market is convoluted and complex and there are many different variables, factors, and options involved.
The market is hugely competitive, mostly because of the large amounts of money that can be made by lenders who successfully attract custom. Building societies and banks, therefore, are constantly updating their portfolio, trying to adapt to the changing economic landscape and offer attractive deals to customers. Ultimately, though the most important thing is how you pay back the capital that you have borrowed, and how (and how much) you pay the interest on the capital.
Paying Back Capital
There are two ways of paying back the capital, either you pay a little as you go along or you pay it all off at the end. The former is known as a repayment mortgage, the latter is known as an interest only or endowment mortgage.
Repayment Mortgages
Each monthly payment pays off both the interest on the original loan as well as a little of the underlying debt. This is generally considered to be the most easy to understand and least risky mortgage type, but if you do not keep up with the repayments than the lender can repossess the property.
Interest Only Mortgages
With this type of mortgage you pay-off the interest on the loan but not the capital itself. At the end of the mortgage term you are expected to repay the original capital, but the method that you use to get enough money to pay off the capital is up to you. Interest Only Mortgages are popular in the buy-to-let sector, and for many first-time buyers because they are generally cheaper than a repayment mortgage. The obvious problem, however, is that people do not consider how they will pay off the capital at the end of the term.
Endowment Mortgages
With an endowment mortgage you use an endowment policy to provide life insurance and to save funds to repay the loan at the end of the term. If the investment performs badly, however, you could face a shortfall on your loan at the end of the repayment period, that means that an endowment mortgage can carry a significant investment risk. In the ‘80s they were very popular but people were often not informed of the risk, this led to large compensation claims against lenders and accordingly the popularity of endowment mortgages has fallen though there are still many policies out there yet to mature.
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To get a good deal on a mortgage or
home insurance be sure to try a number of comparison websites, reputable banks and specialist providers like The Cooperative.
