What are the different types of mortgages

what are the different types of mortgages

Types of Mortgage Repayment

When it comes to the way mortgages are repaid, there are two basic types of mortgages. With repayment mortgages, you pay off a percentage of the capital and the interest on the loan each month until the entire loan has been repaid. These are the most common home loans, and most borrowers find them very manageable. By the time you've reached the end of your contract, you'll no longer have any financial obligations to worry about as far as your house is concerned.

With interest only mortgages, you pay only the interest owed on the loan for the duration of your contract. At the end of the contract, the capital must be repaid, either with the funds from an investment or savings account, or by selling the property itself. Lenders have become more cautious about these types of mortgages because of the higher level of risk involved. Most banks or building societies require that a borrower has a verifiable way to repay the loan, such as an endowment policy, before taking on these types of deals.

As an investment strategy, some borrowers repay the capital on interest only types of mortgages by selling the property once the contract reaches its end. However, this strategy relies on the stability of the market to be effective. If property values have gone down within the term of your arrangement, you may end up with a shortfall after you sell the property. On the other hand, some borrowers make a profit on the sale of their house at the end of the loan.

For most first time buyers and buyers who prefer financial stability over risk, repayment mortgages are preferable to the interest only types. Even if you have a sound investment policy to back up your loan, there's always the risk of having a shortfall at the end of the agreement. If this occurs, you may end up without the means to repay

the capital.

Types of Mortgage Rates

Regardless of which of the types of mortgages you choose when you're buying a home, you may achieve a lower rate if you make a larger home deposit. Your deposit is a lump sum of cash that is used to secure the property when you take out a mortgage. Borrowers can save a great deal of money by making a substantial deposit.

Most residential types of loans have variable rates, which fluctuate over time. Variable rates are based on the lender's Standard Variable Rate, or SVR, which is based on the Bank of England's minimum lending rate. Lenders have the right to adjust their rates within a certain margin. From a buyer's perspective, a narrow margin is more favourable. At the beginning of the contract, you may receive a discounted variable rate, which will save you money for the first 1 to 5 years of your loan.

Fixed rate mortgages are also available for home buyers who prefer more financial stability. With a fixed deal, you pay a guaranteed rate for a certain period of time, usually up to the first 5 years of your contract. However, lifetime fixed loans are available for buyers who value stability over financial savings. With a fixed arrangement, you may end up paying more than the national average if landing rates fall. However, you'll have the security that comes with knowing exactly how much your monthly repayments will be.

The best types of mortgages vary from one buyer to the next. If you're buying your first home and planning to start a family, you may be in the market for a cheap variable loan. If you're a seasoned buyer who's interested in the investment potential of a property, you may prefer an interest only deal. To secure the most competitive arrangement, compare quotes from several lenders before you accept an offer.

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Source: www.remortgage.org.uk

Category: Credit

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