Mortgages are the biggest loans most people will ever take out. That means they’re the most expensive loans most people will ever take out. This means that it’s vital to have the right mortgage for you. Ideally, you’ll arrange your mortgage with help from mortgage brokers. It does, however, help to have a basic understanding of your options.
Repayment mortgages
With repayment mortgages, your payments go to repaying the amount you borrowed plus the interest on it. Repayment mortgages have become the standard in the residential mortgage market and for good reason. They’re simple to understand and they make sure that your home is completely paid off at the end of the term.
In short, repayment mortgages are likely to be the right choice for most people. You will, however, need to think carefully about what specific type of repayment you want. Your first decision is whether you want a fixed-rate mortgage or a variable-rate mortgage. If you do want a fixed-rate mortgage, then you have to decide how long you want to fix for.
A key point to understand about fixed-rate mortgages is that they are not necessarily more economical than variable-rate mortgages. In fact, depending on what happens with interest rates, they can work out more expensive than variable-rate mortgages. They do, however, provide stability and hence can make budgeting easier.
Interest-only mortgages
With interest-only mortgages, you just pay the interest on the loan each month. You only pay off the amount borrowed at the end of the mortgage term. Interest-only loans are commonly used by property investors. They are, however, very rarely used by people buying a residential property. Again, this is for good reason.
In fact, it’s for two good reasons. The first reason is that using an interest-only mortgage creates the risk that you will not be able to pay back the amount borrowed at the end of the term. This is less of an issue for property investors as they can sell investment properties without losing their home. It can, however, be hugely risky for regular buyers.
The second reason is that interest-only mortgages actually work out more expensive than repayment mortgages. You never reduce the amount you owe, so you never reduce the interest you pay. With that said, there are occasions when interest-only mortgages can be the right option. If you’re considering one, definitely get professional advice from experienced mortgage brokers who can assess your financial situation and guide you through the complexities of different loan structures.
Offset mortgages
Although they’re still very niche, offset mortgages can be marketed by different names. They will also have variations in exactly how they work. The general principle behind them, however, is much the same wherever you go.
With offset mortgages, you keep your mortgage and your savings in the same place. You generally have to make a minimum repayment each month as with a standard repayment mortgage. The twist is that the balance in your savings account is used to offset what you owe on your mortgage.
Essentially, you’re swapping the option to earn interest on your savings for the option to pay less interest on what you owe. This can work out very well for some people. Again, however, it’s advisable to get professional advice before signing up for one.