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Types Of Mortgage
Buying a home is one of the biggest commitments you will ever
undertake. So choosing your mortgage does take thought. Take
some time to consider what mortgage is right for you? After all
it's your money you will be spending so, I would recommend
utilizing it in the best way possible.
The kinds of mortgage available to you
There are thousands of different mortgages on the market at the
moment, all offering something different, something similar but
essentially offering one of two types:
* Repayment and Interest, with a repayment and interest mortgage
you (the lender) you will have to payback the specified mortgage
amount plus the interest in a specified time. For example if you
borrowed £100,000 over 25 years, the total plus interest is
£190,000 over 25 years, this is what you will repay. You will
see the balance becoming increasingly smaller over the term of
the loan.
* Interest only, with an interest only mortgage you only pay the
interest on you mortgage, however when the term of your mortgage
is over you are still left with the initial buying fee of your
house. Using the above example this would be £100,000 still left
to pay. When you take an interest only mortgage you will need to
take out an alternate savings plan, in the form of a pension,
I.S.A, or an endowment. These alternate plans run alongside your
mortgage to accumulate the final sum to zero your balance after
the term is over.
Advantages of a repayment and interest mortgage
* It is possible for you to pay off lump sums of your mortgage
to minimize the balance and make term shorter. However do be
careful as some lenders do charge for a early settlement. If you
do decide to repay early it is better to do upon the changing
period of your mortgage i.e. when you are eligible to start
another discounted term with another lender.
* You do not always have to take out life insurance with a
repayment mortgage. Some pension plans that are in place do
cover for unfortunate events such as death.
* You know the full balance of your mortgage and also the term
of the repayment, so you always know when your mortgage will be
paid in full.
Disadvantages of a repayment and interest mortgage
* In the early years of a repaying your mortgage the majority of
the monthly repayment is interest rather than capital. For
lenders who move house regularly, this can mean that little of
the capital is paid off.
* If no life insurance, pensions or assets are in place to cover
the repayment of the house. In the unfortunate event of a death
the house will still have to be repaid. If payments are not kept
up to date then the house will be sold.
* There may be financial penalties for making additional payment
into your mortgage account.
Interest only mortgage
With this type of mortgage, only the interest is paid off with
each mortgage payment. After the term of the mortgage elapses
e.g. 25 year period, the lender is left with the full balance
for the initial purchase of the house. To combat this problem
(if you do not have the money to repay after the term is over)
you the lender can take out another policy to run along side the
mortgage payment? These policies are an ISA, pension plan or
endowment policy. When you find a policy to suit you? The policy
will grow along with your mortgage to accumulate the balance of
you initial payment over the same term as your current mortgage.
So at the end of the specified lending term you have the correct
amount of funds to pay your balance.
Pension Plan
Using a pension plan to accumulate the balance of your mortgage
is a tax free saving scheme. The balance of your house will be
saved over a period of time until you can pay your final
balance. If you do intend to use a pension fund to save for the
balance of your house, consideration should be taken into
account to open another pension fund for retirement purposes
too.
ISA Plan
With an ISA plan you invest in stocks and shares via an
Individual Savings Account (ISA) - which is a tax-free method of
saving. This method of saving may not be suitable for most
borrowers. Before considering this option you should consult
with an independent financial adviser.
Endowment
An endowment is still the most common type of interest only
mortgage which also provides life assurance cover and a fixed
payment for investment. The endowment policy along with the
interest only mortgage should in effect end at the same time,
leaving you with the ownership of your home and nothing to pay.
Endowments have undergone much criticism; this is due to
investors being promised high returns from their investments.
However lately this has not been the case, borrowers have found
their investments have been as good as expected and a shortfall
in the end amount of invested cash will not match the amount
owed on the current property.
Taking into account the recent problems that have arisen
regarding endowment policies it is worth remembering that
returns on endowment policies have been pretty good, however you
do need to see the term out in full. Also endowments do provide
life assurance as part of the actual policy, so in the
unfortunate event of a death the mortgage balance is paid in
full.
Advantages of an interest only mortgage
* Your investments and savings could accumulate more than the
required amount to cover the final payment; this could leave you
more cash for your own personal use.
* Some plans have good tax benefits and help reach the required
amount it a quicker and cheaper rate.
Disadvantages of an interest only mortgage
* In the unfortunate event of your investments not acquiring the
designated amount of cash to cover the loan repayment, the
investor could face a shortfall which they will then need to
pay. If you are worried about a shortfall on your investment,
you should keep in touch with your investor and request regular
updates on the situation of your endowment. If the worst comes
to the worst, you can increase payments to compensate for the
loss of investment.
* Cashing in your endowment, ISA or pension could have adverse
effects on the amount of money you have saved over the past
however many years. If you do decide to cash in any existing
policies you may be subjected to a penalty, this could be a cash
amount specified by the investment company/lender. Please seek
professional advice if you are worried about the end results of
your finances, don't be too hasty as most policies accumulate
more of the cash in the final year.
About the author:
Article supplied by Baymaster. For a complete and extensive
guide to mortgages, please visit our web site at
http://www.completeguidetomortgages.com
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