A mortgage is perhaps the most common type of loan you can get. In fact, most people will have at least one mortgage at some point during their lives. Mortgages come in a vast range of different sizes and shapes, intended to suit a number of different needs. Fortunately, this article should help you to better understand which kind of mortgage might be best for you.
A mortgage, in simple terms, is a loan that is specifically given to a person who is looking to buy a property. The property that you purchase is used as a security against the loan that you take out while you continue to repay it. Over time, you borrow a sum of money and to buy that property over a set amount of years, and you make monthly re-payments on both the loan, and the interest.
The Basic Types of Mortgage
There are two basic types of mortgage available to people throughout the United Kingdom, and the one that you get will depend on how you repay the loan. The two options include a repayment mortgage and an interest-only mortgage – though it is possible to get a combination of both.
When you choose a repayment mortgage, your monthly repayments will repay the interest and the capital on your home. On the other hand, with an interest-only mortgage, the amount of monthly repayments you will make will only pay the interest that you owe, and this means that you will need to find an alternative way of paying off the capital you need to give at the close of the mortgage.
The Pros and Cons of Repayment Mortgages
When you choose to take out a repayment mortgage, you are agreeing to pay off both the amount of money that you borrowed in terms of capital, and the interest that builds up on that capital. In other words, you agree to have paid off the entire loan by the time your borrowing term is over. This means that repayment mortgages are often considered to be a low-risk option for banks.
A repayment mortgage also allows you to make over payments and lump sum payments on your mortgage to limit the level of of capital and interest that you owe. However, your monthly repayments will generally be a lot higher than they would have been if you had chosen to get an interest-only mortgage instead.
The Pros and Cons of Interest-Only Mortgages
If you opt for an interest-only mortgage, then your monthly payments will only be used to pay off the interest that accumulates on the money that you have borrowed. This means that the amount you pay each month will generally be a lot lower than if you had a repayment mortgage. However, you will need to find an alternative way of paying off the capital you borrowed at the end of the term. Most of the time this is done by paying into an investment or savings plan.
The Different Mortgage Deals Available
Just as you can choose between different types of mortgage repayments, you can also choose from a wide range of different mortgages too. The most popular options are generally fixed rate, variable rate, and tracker mortgage deals.
A Tracker Mortgage: In a tracker mortgage, the amount of interest you pay will follow the base rate for the Bank of England and is usually a set percentage above it for at least a significant period of time.
Fixed-rate mortgage: In a fixed rate mortgage, the interest rate is fixed for a specific amount of time – usually either two years, three years, or five years. This is very good for people who want to be sure of how much they need to budget for. However, if interest rates continue to drop during the term of the deal, your mortgage could end up being more expensive than other offers.
Variable rate mortgage: Finally, in this type of mortgage, you pay the variable rate of the mortgage lender. Every different lender comes with a unique variable rate which is usually higher than the base rate for the bank of England, but does roughly track that amount – changing when the rate changes.
What to Consider When choosing a Mortgage
When you are trying to select the perfect mortgage for your specific needs, it’s worth remembering that there will be a number of different concerns to consider. For example, you will need to ask yourself how much you can realistically afford to borrow – how long you want to borrow that amount for, whether you want to pay for a repayment-only or interest-based mortgage, and the economic climate you are currently in. It’s also worth thinking about the kind of interest deal you’re getting involved in.
Some people want to look for flexibility with their home mortgage that gives them the opportunity to pay off large lump sums if they suddenly come into a large amount of money. On the other hand, you might want to make sure that if you run into tough times, you’re allowed to take a payment holiday.