Factors when choosing a mortgage
First Time Buyers Guide: #2
Factors to consider when choosing a mortgage
Repayment versus Interest Only Mortgages
Mortgage choice depends on a borrowers current and likely future financial situation. The first decision is whether to choose an interest-only or repayment mortgage.
Interest Only Mortgages
With an interest-only mortgage, the monthly repayment does not pay off the actual debt, this type of mortgage purely covers the cost of borrowing the money. At the end of the mortgage term the amount originally borrowed will still be owing. In order for a borrower to clear the mortgage debt, there should be a method in place to build up sufficient funds to pay off the debt at the end of the term.
Repayment Mortgages
With a repayment mortgage, the monthly repayment covers the interest as well as the actual debt. In the early years of a repayment mortgage the debt is large and therefore more of the monthly repayment goes towards paying the interest. Gradually as what is owed reduces, the interest decreases and the monthly repayment starts to pay off the actual debt. Monthly payments on repayment mortgages are higher than on interest-only mortgages but, as well as covering the interest, the original debt is paid off meaning nothing will be owed at the end of the mortgage term.
First time buyers struggling to get on the property ladder may consider cheaper interest-only mortgage deals. However, after the first couple of years it is recommended that interest-only deals are converted to repayments to ensure the debt is paid off in full, by the end of the mortgage term.
Next - #3 Different mortgage products