Mortgage Introduction

A mortgage is normally the biggest debt that we take on in our lives, so choosing the right one is very important and could save you thousands of pounds, while choosing the wrong one could cost you thousands. So how do we go about choosing the right mortgage?

The first choice is whether you go for a repayment or interest only type mortgage.

With a repayment mortgage, each month your payment pays off the interest on your loan, as well as an initially small part of the loan itself. As you pay off more and more of the loan, the monthly interest reduces and the percentage of your payment that pays of the loan increases. Eventually the loan is paid off completely.

With an interest only mortgage, you only have to make payments to the lender to cover the monthly interest on the loan. You also setup a separate policy that you pay into, and this will eventually grow to pay off the loan in full. This type of mortgage has lost popularity in recent years due to many people finding their separate policy hadn’t grown enough to cover the loan when using an endowment policy.

Once you have decided on the type of mortgage you would prefer, you need to decide which type of interest rate is best for you. If you would prefer to know the exact amount you will be paying each month for the first few years, a fixed rate mortgage is most likely best for you. The interest rate will be fixed for a certain period of time so that you know exactly how much you will be paying. A capped rate is similar, but rather than being fixed, the interest rate will not go above a certain rate for a period of time, but may go below that rate. Because the rate could go down, but won’t go up, the capped rate is normally higher than a fixed rate at the same period in time. If you are happy with the interest rate maybe going up, you may be better off with a variable rate mortgage. Here you normally get a ‘discount’ off the standard rate for a fixed period, before the rate returns to a set pattern of varying with the Bank of England interest rate.

You will also need to decide how long you would like the mortgage to last for – known as the ‘mortgage term’. A longer term will reduce the monthly payments, but increase the total payable, while a shorter term will involve higher payments, but a lower total cost. A usual term is 25 years for a standard mortgage.

Always remember to look at a number of mortgages, and take a good time to work out which is best for you. Also, remember not too feel intimidated when talking with a lender, thinking they wouldn’t want to lend to you. You are in the position of power; they need to lend people money to stay in business, you can always find another lender.