If you decide to buy a house, then your mortgage will probably end up being the biggest loan you'll ever get. But do you know your repayment from your interest only and why it always pays to check the fine print!
If you are thinking about purchasing a house, you will need to gain an understanding of mortgages and how they actually work. The features that you can expect to get with a mortgage will differ a lot, depending on the kind of mortgage that you opt for and the lender that you use.
With a few helpful tips, mortgages need not be perplexing. Here is a guide to the most commonly taken-out mortgages and how you can go about choosing the right mortgage to suit your individual needs and requirements.
Repayment mortgages are generally the most common kind of mortgage taken out by buyers. Using a repayment mortgage, you can make a monthly payment towards your overall mortgage debt (i.e. the amount that you owe on a property after any deposit has been taken off).
This kind of mortgage allows you to pay back the amount that you owe as well as any interest on the loan until your mortgage is fully cleared i.e. to the point where you own the property outright.
Repayment mortgages are considered to be a less risky kind of mortgage as you will pay a set amount each month for a pre-determined term (this can differ from lender to lender, but generally a term will be around 2-5 years).
Alternatively, you may opt for an interest only mortgage. This kind of mortgage allows you to pay off the interest on your mortgage loan for a set number of months/years, but not the capital. When the term ends, you will be expected to repay the capital amount. Interest only mortgages are very popular with first time buyers and buy-to-let customers as they are generally a lot cheaper than repayment mortgages.
However, if you do opt for an interest only mortgage, it is worth bearing in mind that you will need to consider how you are going to pay back the capital once your term runs out.
In addition to repayment and interest only mortgages, a number of other mortgages are also available from different lenders, including endowment mortgages.
An endowment policy can be used to provide life insurance and save you money, allowing you to repay your loan at the end of a set term (this is usually around 20-25 years).
Variable mortgages are also available, this kind of mortgage follows the market rate and to this end, you will find that your payments will go up or down depending on the current financial climate.
The kind of mortgage that you decide to take out will very much depend on your own personal circumstances i.e. how much you can afford to pay each month, the price of the property, the amount a lender is willing to lend to you (this is often based on your credit rating/previous financial dealings) and how large your initial deposit is likely to be.
It is very important to consider your mortgage options carefully and always remember that you must keep up your payments to avoid negative scenarios such as the repossession of your house.