Mortgages

Before you take out a mortgage you need to understand that there are two main types of mortgage, namely interest only and repayment, and each has its own advantages and disadvantages. It is advisable to research the subject carefully and seek appropriate financial advice before deciding which to take out.

Interest-only mortgages allow you pay the interest due to your mortgage lender monthly. You also require to have a separate saving policy that is designed to pay off the mortgage as it matures e.g. ISA, pension or endowment.

As with any investment, there is a risk in that the final pay out could be lower than expected. With repayment mortgages, there is no such risk. Here you pay off the interest and the capital over the life of the mortgage. This ensures that the mortgage will be paid off at the end of its term. However, they require you to pay more on a monthly basis than interest-only.

The mortgage can also have a fixed, variable or capped interest rate.

With a fixed rate the amount you pay is fixed over a period of time. During this time, no matter what happens to interest rates, your repayments remain the same.

A variable rate mortgage can go up or down depending on what happens to the Bank of England base rate in the period.

With capped deals, your rate is guaranteed not to go above a certain level but can also go down if the Bank of England rate drops.

Other popular types of policy include flexible mortgages and current account mortgages. With a flexible mortgage, you can make extra payments to your mortgage at any time without incurring any penalty. This means that you could pay your mortgage off far quicker than you had originally intended with a traditional mortgage.

Current account mortgages combine a mortgage and a current account. By paying in a salary the capital is instantly reduced and so is the interest. While your salary may only be in there for a day or two, it is working to pay off your mortgage and helps to reduce the length of the mortgage.

The most important thing to do is to shop around for the best deal for you. If you are in doubt it is best to seek advice from an independent financial advisor.