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Types of Mortgages

types of mortgage

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Your mortgage is probably the largest financial transaction and commitment you are likely to make, so choosing the right type is important. Essentially, there are two key types of mortgages - repayment and interest only. Once you've identified the way in which you want to repay the money lent to you, narrowing down the choice becomes easier. It then becomes a case of finding the best deal.

How is the mortgage repaid?

You will pay your mortgage in monthly installments, but first you need to decide which option will suit your needs, and what you can realistically afford.

 

How it works

Benefits

Drawbacks

Repayment

You pay some interest and capital off each month, and the capital reduces over time. The loan duration is usually 25 years, but can be longer depending on the lender and when you want to retire.

There are no hidden surprises. At the end of the term, providing you've kept up with repayments, you're guaranteed to pay off your mortgage.

Your monthly payment will generally be higher than interest only. There's no potential investment windfall at the end.

Interest Only

All you pay the lender each month is the interest on the amount borrowed. At the end of the term you will need to have enough funds to pay back the original amount borrowed. It is usually recommended that you make a separate payment each month on top of your mortgage repayments into a savings scheme to build up the sum needed to pay off the mortgage at the end of the term.

Your monthly payment is usually lower than the equivalent repayment mortgage. Your investments may perform well, giving you surplus cash after paying off your mortgage.

You are relying on your investments to perform well. It is up to you to check whether there is going to be enough to pay off the capital amount at the end of the mortgage term. There are no guarantees that you will have enough to pay off your mortgage at the end of the term.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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Whether you are looking for the best deal on a residential mortgage, or if you are considering Life Cover, Critical Illness, Income Protection or a Healthcare Plan, we offer expert and impartial mortgage advice on the widest choice of products in the UK.