mortgage guide

Once you have decided on the best interest rate structure you will need to think about how you wish to structure the repayment of the capital debt. Do you wish to take out a conventional repayment mortgage, or back your mortgage with an ISA or endowment policy or pension plan? Alternatively you may wish to simply pay the lender the interest on the loan with a view to repaying the debt at some time in the future either from your own resources or maybe from the sale of the property. Let's now look at the various repayment options and what each one means in detail.

Repayment Mortgage

A repayment mortgage is a straightforward capital and interest mortgage where each month you pay the agreed interest in addition to a portion of the capital that you have borrowed. Mortgages of this nature are arranged over a set number of years (normally up to 25) and at the end of the mortgage term, all the interest and the capital has been repaid. The advantage of this type of mortgage is that it is simple and guarantees that, providing all the correct repayments are made on their due dates, the mortgage will be paid off, in full, at the end of the agreed term.

The main disadvantage of this type of arrangement relates to the way that the interest is calculated and collected. In the early years of your mortgage the majority of your monthly payment will represent the interest being charged with only a small part going towards a reduction in the outstanding debt. This means that the amount you owe reduces very slowly in the early years with the majority of the capital being repaid in the last few years. On a 25 years mortgage it would not be uncommon to still owe over 50% of the original debt after the first 15 years. The disadvantage of this is simple and obvious, if you wish to repay the mortgage early, the amount by which you have reduced the debt will be significantly less in the early years than the later years.

This type of mortgage is, nevertheless, very flexible and does allow you to increase your repayments at any time with a view to shortening your mortgage term (this may not apply if you are restrained by a fixed or discounted rate as the lender may then impose penalties. If you think you may wish to do this at some stage then you should check out your particular lenders policy on this before committing yourself). With this type of mortgage life assurance is not included and will have to be taken out separately if required.

Interest Only Mortgage

Interest only mortgages are becoming increasingly popular as people wish to take more control over their financial affairs and have more flexibility.

An interest only mortgage is exactly what it says. You will pay to the lender only the interest on the loan for a set period of time (again normally up to 25 years). At the end of this period of time the lender has the right to call in the loan and you will be expected to be able to repay the capital borrowed. To do this it is usually necessary to run some kind of investment plan alongside the mortgage with a view to building a cash lump sum which is sufficient to repay the mortgage debt at the end of the term. There are a number of ways in which people do this and these include endowment policies, ISA's and pension plans.

If you are considering an interest only mortgage then it is important that you take the right professional advice and we would strongly recommend that you talk with an Independent Financial Adviser who can examine all the options with you and explain any pitfalls.