What are the different kind of mortgage available?
Beginning the search for a mortgage can be a daunting experience. You’ll find a host of mind-boggling phrases thrown at you and even telling the difference between each type of mortgage can be tricky before you decide which is the best mortgage for you.
The first thing you need to know before your start to compare mortgages is that they fall into two main categories – interest only mortgages and repayment mortgages.
This is when you pay the capital – or amount you have borrowed – plus the interest which is added on. Each monthly repayment will include capital and interest, which is determined by the interest rate of the mortgage.
You will normally get an annual statement from your mortgage provider detailing how much you have paid off your mortgage and how much is still left on the loan.
Repayment Mortgages – Advantages
With each month that goes by, you know that you are closer to paying off your repayment mortgage. Once the term of the mortgage is up, you’ll be free of it forever and the property you have used the mortgage to purchase will be your own.
There are other advantages to repayment mortgages such as the facility to overpay or even pay a lump sum off the loan. This will mean your loan gets paid off quicker or that your monthly repayments are reduced.
You can also take out a repayment mortgage without needing to take out life assurance as well.
Repayment Mortgages – Disadvantages
Depending on how your lender calculates interest, you may find that your monthly repayments for the first couple of years of your repayment loan go towards the interest on the loan.
This means you could end up not much paying off much of the capital if you move house a couple of times.
There are other disadvantages with repayment mortgages, especially if you haven’t taken out life assurance along with it.
If you die before the term of the mortgage ends, the remaining balance will have to be paid. You could end up leaving some hefty debt behind for someone else to take on and they may have to sell the property in order to raise the money to settle the rest of the mortgage.
While some providers will allow overpayments and lump sum payments, you may find that there are charges or other punitive measure associated with them.
Interest Only Mortgage
As it suggests, an interest only mortgage simply pays off the interest of the loan you took out to buy the property. Your monthly payments will not go towards repaying any of the capital on the mortgage. Interest only mortgage can also be referred to as endowment mortgages.
Of course, if you’re not paying off any of the capital, you will need to find another way to raise the money to eventually repay the whole mortgage by the time the term is up.
This can be done in a number of ways – with an ISA, a pension plan or an endowment policy.
However, you need to be very disciplined if you go down this road and keep paying regularly into whatever form of saving you opt for. If you fall behind, you may find that you don’t have adequate funds to pay off the loan at the end of its term.
Let’s have a look at the repayment options available to run alongside your interest-only mortgage:
This is a useful repayment option for a self-employed person. It involves making monthly payments into a pension fund. At the end of the mortgage term, the money in the pension fund, which is tax-free, is used to pay off the mortgage loan. The remainder of the fund can be used as a pension by the plan-holder.
If you are thinking about a pension plan, it’s essential to speak to a financial adviser who you can trust and who is properly qualified.
ISA stands for Individual Savings Account and, like the pension fund, the money you invest into the account is tax-free. Depending on the provider, it can offer competitive levels of interest. If you are particularly savvy when it comes to finance, an ISA can be an astute option.
Even if you’re not, a detailed consultation with a qualifier financial advisor can help you unravel some of the more complicated aspects of an ISA. It works in pretty much the same was as a pension plan in that the money you have saved in it over the years can be used to pay off the capital remaining on the mortgage loan.
An endowment plan gives you the chance to pay a fixed amount into a plan which also includes life assurance. The plan requires a certain level of investment and is intended to mature by the end of your mortgage term, allowing you to use the funds accrued to pay of the capital.
However, with investments not currently performing strongly and low inflation, endowment plans have proved to be less popular that other repayment vehicles.
Therefore, even when an endowment plan matures, it may still not cover the outstanding balance of the mortgage.
But endowment policies have always been a common form of repayment option and many borrowers have more than one endowment plan.
They require a certain level of patience and discipline. Cashing an endowment plan in too early will not give you the required funds to pay off your mortgage.
Like any form of investment, it’s always wise to consult a financial advisor before going ahead.
You can hold an endowment policy and ISA at the same time to run alongside your interest-only mortgage. If you allow your endowment plan to flourish to its full potential and see out a full term, you can get a generous return.
You’ll also have life insurance with an endowment plan, so if you die before the term ends, the balance of the mortgage can still be paid off.
Interest-Only Mortgages – Advantages
You may find that certain interest-only mortgages offer good tax benefits. If you save more in your repayment plan than is needed to settle the outstanding balance on the mortgage loan, your lender will pay you a cash lump sum for the difference.
Interest-Only Mortgages – Disadvantages
Cashing in your repayment plan too early can lead to a shortfall when it comes to repaying the mortgage and you could also be penalised by your lender. However, such an event will be explained to you before you take out the loan.
If you choose a repayment option which isn’t directly linked to your interest-only mortgage, your lender won’t be able to keep an eye on it. If, therefore, you fall behind or don’t keep on top of it, you may find you don’t have enough funds to pay off the capital of the mortgage.
When any form of shortfall occurs, it is the responsibility of the borrower to make up the difference.
We hope that gives you a clearer picture about the mortgage options available to you. If you want to compare various types of mortgages or repayment options for interest-only mortgages, look no further than ePepi.com.
You can get online quotes or get top mortgage advice from one of our experts on [mortgagenum].