Mortgages
General Mortgage Advice
Choosing a Mortgage
There are a large number of different mortgage options on the market - all suited to different lifestyles and circumstances. It can be confusing understanding all the features of the different products and knowing which one to choose.
You need to decide:
- Do you want a repayment or interest only mortgage?
- What type of interest rate calculation do you want?
- What other special features suit you?
- If you're looking at an interest only mortgage - what type of repayment vehicle suits you?
Repayment or interest only?
The key decision you have to make is between a repayment or interest only mortgage - you are either paying both the interest and a portion of the capital or only the interest on the money you have borrowed. It is also possible to set up the loan on a 'part repayment and part interest only' basis. A description of these methods is provided below
Repayment mortgages
Repayment mortgages are the most popular choice for today's borrowers. With a repayment mortgage your monthly repayments cover both capital and interest on the loan. No other repayment vehicle is needed, but your lender may insist on life insurance in case you die before the mortgage is cleared.
A repayment mortgage is simple, straightforward and easy to understand. It also avoids the risk of investing in the stock market for your repayment vehicle. However, unlike a pension, ISA or endowment mortgage, repayment loans do not give you the opportunity to benefit from a rising stock market.
Interest only mortgages
With an interest only mortgage, your monthly payments to the lender cover only the interest on the loan (i.e., they don't repay any of the capital). The full amount of the loan has to be repaid to the lender at the end of the term.
To ensure you can make this final payment, you invest additional funds in investments, which are designed to generate enough (preferably more than enough) capital to repay the loan at the end of the term. On the plus side, you can choose from a variety of investment vehicles, some of which can have tax advantages. And should you move or re-mortgage, your investment vehicle can usually be reallocated to the new mortgage. However, unlike a repayment mortgage, the total amount of your debt does not reduce over time. And there is no guarantee that your chosen investment vehicle will grow sufficiently to repay your loan (although you can usually top up your contributions to investments as you go along if this looks likely to be the case).