A Guide To Mortgage Types

Choosing a mortgage used to be relatively straightforward. In the last property recession, you had a choice of interest only or repayment and you usually turned to the company you banked with or a local building society. If you bought a property for under £100,000, you only needed a 5% deposit and for ones over £100,000 you normally needed to pay a 10% deposit.

Things have a changed a lot since the early 1990s. Fundamentally, though, choosing a mortgage hasn't actually changed that much, you just need to cut through the jargon and ignore reports of how many mortgages are available or not. Most of the information given around mortgages is just clever marketing tactics to persuade you that one lender's product is better than another.

Interest Or Repayment?

To begin with, you need to decide whether you want an interest only mortgage or a repayment mortgage.

To explain the difference, imagine you are borrowing £100,000.

Interest Only If you took out a mortgage for 25 years on an interest only basis you would make mortgage payments to the lender and at the end of the 25 year term, you would still owe the mortgage company £100,000. This is because your mortgage payments would only have been equal to the interest that you owed the lender for borrowing the £100,000.

Repayment If you took the same mortgage out for the same term but on a repayment basis, your mortgage payments would be higher than the interest only payments, as at the end of the 25 years you would own the property outright as you would have paid the interest for borrowing the money AND a further payment to pay off the capital - in other words, the £100,000 you borrowed.

What Will You Pay?

In today's market if you borrowed £100,000 at 6% interest, you would pay:

Interest only: £500 per month
Repayment: £652 per month

What About Savings?

If you take out an interest only mortgage, then you can use other methods of savings or investments that will hopefully grow enough to pay off the £100,000 at the end of the term. After the endowment scandal (the traditional way of saving to pay off the money borrowed up until the mid 1990s), you can save in all sorts of different ways, via ISAs, investing in stocks and shares or with profit funds. You can still save in endowment plans and they are still a perfectly valid repayment vehicle as long as your growth assumptions are realistic.

When making your decision between interest only and repayment, it is essential to talk to a fully qualified independent mortgage advisor and/or an independent financial advisor - both of whom are regulated by the Financial Services Authority.

To contact Kate, go to www.designsonproperty.co.uk