Types of Mortgages

Types of mortgages

If you are buying a house, then you’re probably thinking about getting a mortgage to help pay for it.  Here you’ll find some really useful advice on how to choose the best mortgage.
It can be a minefield trawling through all the different mortgage options on the market, but at the end of the day mortgages boil down to two options interest only and repayment.

Mortgage types:

There are only two main types of mortgages: repayment mortgages and interest-only mortgages:

• With repayment mortgages you are paying back interest plus a bit of what you have borrowed every month. Eventually, therefore, your monthly payments pay back everything you owe to the mortgage company.
• With interest-only mortgages you are only paying back the interest every month. This makes the monthly payments cheaper, but it's important to remember that you will still need to pay off the amount you originally borrowed. This will become due in a lump sum at the end of the mortgage term, so you must have a savings plan, or alternative arrangement, to make sure the amount you originally borrowed can be repaid.

Each of these mortgages then breaks down into different types again, such as fixed rate, or tracker. For more information on these see the ‘Choosing a mortgage' section.

How long do you want the mortgage for?

Whichever type of mortgage you choose you have a choice about how long you take the mortgage out for. The normal is about 25 years.

The longer the term, the lower the repayments will be, but the more you will repay in interest overall. Don't overstretch yourself with your monthly repayments. Bear in mind that a mortgage is a long-term commitment. Other costs such as bills and household expenses could increase over time and this could affect your ability to meet your mortgage repayments if you have over committed yourself.

Look at the whole package:

Consider the whole mortgage package and don't just focus on ‘cheap deals' that might only last for the first few months of the mortgage. It's important to look at the full range of benefits offered by the mortgage and its suitability for you. A mortgage is a long-term commitment.

Get some advice and don't forget to shop around!

•    Keep to a budget

Consider the two types of mortgage very carefully. If you do go for an interest only mortgage then make sure that you have enough money to repay it at the end of the term.  Look at your financial plan and current income and see if you’ll be able to keep up the payments.  Imagine having to spend on something suddenly – like a new central heating system – could you still afford the mortgage?

•    Select a term you can afford

The longer the term, the more interest you will repay overall, so without overstretching yourself select a term you can comfortably afford.

•    Variable interest rates rise and fall

You need to bare in mind that if you are on a variable interest rate and interest rates rise in the general economy, the mortgage company will likely pass this increase onto you.  This means that you could find your interest rate is increased and therefore your monthly repayments are too.  Also, If your fixed rate comes to an end and you have to re-mortgage when interest rates are higher, then your repayments again could be higher.

•    Save for emergencies

Make sure you have an emergency fund in place in case something goes wrong.

•    When saving choose higher rates, when borrowing choose lower rates

Interest rates can be confusing but always remember that you’re looking for a high rate for savings and a low rate for mortgages and other borrowing.  That said you need to consider the whole package being offered by the mortgage company, and whether or not it’s the right one for you.  Don’t just go for the cheapest monthly cost or one that offers a huge cash-back.  Look at what other options the mortgage company offers – for example payment holiday or maybe allowing you to make overpayments.  Also, if you are being offered a low interest rate for an introductory period, you need to ask the question what happens after this period ends? Will I be tied in at a high interest rate for a long period of time?

•    Try to consider future events

Bear in mind that a mortgage is in place for a long period of time, and that your circumstances may change, so when working out how much you can afford to borrow, try and consider likely future events – it’s a bad idea to borrow the maximum you can afford and not be able to spend any money on anything else.

Mythbuster

Mortgages can be very confusing and there are a lot of myths surrounding them. Take a look at some facts below:

• The mortgage lender will do a background check to make sure you have a good credit history so that you’ll be able to keep up your payments

• Getting a mortgage doesn’t actually mean that you own your house. You’ll only own your home when you have paid off the mortgage in full; in the meantime, the bank or building society owns most of it.

• You can change your mortgage provider and move your mortgage to take advantage of better deals. It’s best to check if you will have to pay any fees for transferring or cancelling your mortgage.

• People who fail to pay their mortgages don’t go to prison but they do risk losing their home.

• If you lose your job the State may cover the interest on your mortgage, not the capital amount. It only covers up to the first £100,000, and only under certain circumstances. If you have £8,000 in savings you won’t qualify, if you have £3,000 the limited help is reduced, and you won’t receive any help until you’ve been unemployed for nine months.

Summary

A mortgage is a long-term loan you take out to buy a property. There are many things you need to consider when taking out a mortgage. Take a look at the checklist below to remind yourself of the type of things you’ll need to consider.

• Consider the two types of mortgage very carefully - interest only and repayment.
  

• Don’t borrow the maximum so that you can’t afford anything else in your life.

• The longer the term, the more interest you will repay overall, so without overstretching yourself select a term you can comfortably afford.

• Make sure that you can pay your mortgage every month. To do this you’ll need to work out your monthly budget and stick to it!

•  Make sure you have an emergency fund in place in case something goes wrong. Putting a little bit away each month can go a long way just when you need it. 

• Until recently, mortgages were a religious obstacle to any Muslim who wanted to buy a home. Muslims must be sure that the mortgage complies with Sharia’a (Islamic) law.

Buy a House   Money Home