The mortgage you choose for your house is a very important choice – the wrong mortgage could end up costing you thousands of pounds more than necessary.
It is also important to choose the right repayment time for you. Choosing a longer time to repay the mortgage will reduce the monthly repayments, but it will also increase the total cost of the mortgage. For example repaying a £100,000 mortgage over 15 years at 8% will cost £175,320 with monthly payments of £974, repaying over 25 years will only cost £781 a month, but the total cost is £234,300 – almost £60,000 more! There are 3 main choices you have when you are deciding on a mortgage. The mortgage type, interest type, and the mortgage term. The first choice you need to make is which type of mortgage to choose.
There are two types of mortgage to choose from – all mortgages will be one of these two types:
|Repayment||You pay off the interest and the value of the loan over the duration of themortgage. At the start of the mortgage your payments are mainly covering the interest on the loan. But as you get further into the mortgage period, the payments cover more and more of the loan amount as the interest on the shrinking loan amount drops.|
|Endowment||This can also be known as an interest-only, pension or ISA mortgage. You only repay the lender the interest on the loan every month, but you also invest in a separate policy which will repay the actual mortgage amount. As this is an investment, this is a risk that the final amount you have could be less than the amount you need to cover the mortgage – but it could also be too much, giving you a nice reward.|
The next decision is the type of interest you would like for your mortgage – there are three types to choose from:
|Variable Rate||This is the standard rate offered by mortgage lenders. The interest you pay on your mortgage will varywith Bank of England interest rates.|
|Fixed Rate||This is when the interest rate on your mortgage is fixed for a certain amount of time – usually 5years. This enables you to plan ahead financially because you will know exactly what your payments will be each month for 5years. After the fixed rate time has passes, you will return to variable rate.|
|Capped Rate||Similar to fixed rate, but the rate is capped rather than fixed. I.e it will not go above the cappedrate, but it may fall. For this reason, the capped rate will be higher than standard fixed rate. As with fixed rate, theamount of time the interest rate is capped will limited.|
Mortgage TermYou should now decide now long you would like to take to pay back the mortgage. This is called the Mortgage Term. You need to find a compromise between how much the mortgage costs in total, and how much you can afford each month – remember that the interest rate may go up. The normal mortgage term is 25 years.
Choosing a mortgage is a huge choice, so once you have chosen the mortgage that is right for you, wait for a few days, then look over your choice again, and make sure it is the right one for you, before you actually go ahead with the mortgage. Make sure you read all the small print of the mortgage. Many people dont bother reading the details, but you need to know if there will be any penalties for missing a payment or paying the mortgage off early, and how long any fixed or capped interest rate will last. If you have opted for an endowment mortgage, keep up to date and make sure you are on target to be able to repay the mortgage. If you are not, it is best to increase you savings early to avoid a big shock.