03 Nov What is a Mortgage?
A mortgage is simply a loan that you borrow to purchase a property, you repay the loan over a period of time (the term), and loan is usually secured on the property.
There are many different types of mortgage available in the market. The choices can be confusing and, while you want the best rate, there is much more to consider. Understanding what’s best for you is not easy as it’s not always the cheapest that best suits your individual needs.
For example, do I want a fixed rate; how long do I want to repay the loan; which mortgage suits my situation; what fees are involved? And so on…. The list is long!
What type of repayments are available to me?
Your first major decision is whether you want repayment or interest only – but what’s the difference?
A repayment mortgage is by far the most common type of mortgage. With repayment your monthly payments consist of some interest and some repayment of the capital borrowed. This means that, at the end of your term, you will have paid off the whole loan and related interest. Should you wish to move during the term of your loan you may be able to take your mortgage with you (called porting), or you may choose to repay the balance of the loan and take out a new loan for your new property. As you have been paying off the capital you may have some equity to use towards your new purchase. Although it depends on individual requirements, a term of 25 years is fairly common.
Advantages – you know where you stand financially; you know how long it will take you to pay off your debt; as the value of your property increases so does the equity as you are paying off the capital loan; your home belongs to you at the end of the term.
Disadvantages: interest rates can fluctuate meaning your repayments can go up or down during the term of your loan, if you move and take out a new loan it may possibly be for another 25 years which lengthens your total borrowing over time.
Interest only mortgages, as the name suggest, repays only the interest on the initial loan so the capital does not reduce. This means that at the end of the term you still have to pay the capital amount owed. You will need to consider how you will be able to pay off your initial loan at the end of the term. This could be via investments over the term of your loan, you can save up or rely on an inheritance, or you can hope that the increase in the value of your property will cover the loan (although this would mean selling or re-mortgaging to pay off the debt).
Advantages: your monthly repayments will be lower as you are not reducing the initial loan, just the interest. You could switch to a repayment mortgage at some point.
Disadvantages: as with repayment mortgages, interest rates can fluctuate; there is a risk that you cannot pay the capital off at the end of the term; if you are investing to raise the capital, your investment could fail; you could lose your property if you cannot repay the capital; lenders may require evidence of how you intend to repay the capital at the end of the term before they will offer you the loan.
A Buy to Let mortgage is when you purchase a property with the intention of renting it out. Rules are different for this type of purchase and your advisor can discuss this with you. There are two types of BTL situations. You may wish to have several BTL properties as a business investment, or it may be that you want to rent out your current property and purchase a new home for yourself (Let to Buy). If you want to rent out your mortgaged property you will need permission (Consent to Let) from your lender.