A mortgage is a loan made for the specific purpose of purchasing property. The word is derived from a French phrase meaning 'debt until death'. Though most can expect to be mortgage free somewhat earlier than this, a mortgage is still likely to be the biggest and longest lasting debt we incur. On the other hand, long term house price growth has meant that,for many people, property has also been a highly profitable investment.
There are two approaches to making mortgage repayments;
Repayment Mortgages use your monthly payments to repay both the capital (i.e. the original amount borrowed) and the interest accrued on the loan. The amount paid against each is not equal and the ratio varies over time. Early on payments against interest are dominant. Monthly payments are typically higher than for an interest only mortgage, but the mortgage is guaranteed to be repaid in full at the end of the term. In effect, you pay a premium for the peace of mind of knowing that your mortgage will be paid off at the end of the term.
Interest Only Mortgages use your monthly payment to pay off only the interest component of the mortgage To pay off the capital the borrower must make regular contributions to an investment vehicle such as an Endowment policy, ISA or pension. This involves an element of risk, as it cannot be absolutely guaranteed that the investment will grow to the level required to pay off the loan.
If taking on an interest only mortgage consider consulting an Independent Financial Adviser (IFA) to help choose the right investment product for you. Check out www.unbiased.co.uk for your nearest IFA. When choosing an IFA make sure you understand how they are re-numerated. Typically this will be either an upfront fee payable by the client (i.e. you), commission on products sold, or a mixture of both. Whatever model is used, don't just accept the recommendation given. Make the IFA earn their money by explaining to your full satisfaction why the product recommended is the best one for you. The main types of investment vehicle to research or get advice on are endowment policies, ISAs or a pension fund.
Make sure you review the performance of your investment regularly to make sure it is on track. Remember, it is your responsibility to make sure the loan can be repaid, not that of the lender.
If you need more information to decide which mortgage is the best for you, then check out
TheRateTart Guide to Mortgages.
Please note that the information on this web-site is intended to provide an overview of the different types of mortgage available. Nothing on this website should be construed as advice and you should not make your mortgage decision based solely on this information.
TheRateTart recommends you consult an independent mortgage advisor to help identify the most suitable mortgage for your needs.
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