Best Loans News

Its fair to say that purchasing a home is probably the biggest financial commitment the average person living in the UK, will make during their life. However, deciding which home loan or mortgage is the right one for you can be a little daunting at times. Most people realise that the two most important factors to consider when choosing a mortgage are “how long will it take to pay back”, and “what the overall cost will be” in terms of interest.

In response to this most common conundrum, we cover a few examples of common mortgage types and explain your options when it comes to interest repayment.

Different mortgage types

Repayment – The repayment option is one of the most popular mortgage products. In essence, a monthly repayment is made to your lender, which accounts towards repaying a percentage of the actual loan, plus a percentage of the interest. Repayment mortgages are relatively straightforward and are considered to pose less risk than other types of home loans.

Interest only – The interest only repayment option does essentially, exactly what it says on the tin. Your repayments are used to pay back the loan interest only, not the actual capital. At the end of the loan term, it is then your responsibility to repay the total sum of the loan.

This particular mortgage type is popular among people betting against the market and BTL enthusiasts. They offer a cheaper alternative to standard repayment mortgages, however it is important to understand that you must also be able to repay the entire mortgage loan at the end of the term.

Endowment – Due to a spate of mis-selling by lenders in the 1980’s, Endowment mortgages have become increasingly unpopular in recent years. An Endowment policy is used to provide life cover with the intention of accumulating funds over the period, In order to repay the loan.

However, Endowment policies are very much affected by market performance. If the policy doesn’t perform as well as expected, it is possible to receive a shortfall in the loan at the end of the term.

Your interest options

A mortgage, like any other loan is subject to accumulative interest. Where a mortgage differs from other loan products, is in the way in which interest can be paid back. Below are a few examples: -

Fixed – If budgeting to repay your mortgage is key, fixed rate deals can be helpful. In essence, a potential lender will agree to fix the rate of interest for a period of 3 – 5 years. If your plan permits, you are then able to swap and change your mortgage to keep your repayment rate at a comfortable level. However, It is important to note that some lenders may not allow you to do this, and you should always check the terms of your mortgage before committing.

Variable – A variable rate is calculated based on current interest rates, usually once a year. By choosing a variable rate mortgage, it is likely that your repayments will vary throughout the lifetime of your loan. Almost everyone who has a mortgage will default to a variable interest rate at some point in his or her term.

Other types of interest repayments include Capped, Discount and Cash Back deals.

Can there be any hidden clauses I wont know about?

The financial services watchdog (the FSA) has produced a document known as “Key Facts” which contains all the particulars of your loan in a clear, easy-to-follow format. This document must be presented to any new customer agreeing to a mortgage, and it must be confirmed that they have received it prior to agreeing to the loan.

The document is designed to protect the consumer from committing to a plan if it contains clauses they are unaware of, hence reducing the chance of the product being mis-sold. You can find out more about Key Facts by visiting the FSA website.

The information contained in this article does not constitute as professional advice. You should not rely on information contained in this article to make or refrain from making decisions on a mortgage or any other type of financial product. The article has been written for general informative purposes only.