Types of Mortgage
There are two types of mortgages.
Repayment Mortgage:
Payments are calculated so that the whole loan is repaid at the
end of the agreed loan term.
Each payment consists of a combination of interest and capital
repayment. In the early years of a loan the interest element forms
the major part of the payments and as a result the borrowing reduces
gradually. However as time goes by the proportion of capital repaid
increases and the loan will be repaid at the end of the term. This
is on the proviso that all payments are made to the lender on time
and as they fall due.
The main advantages are:
- Simple and easy to understand
- Your loan is guaranteed to be repaid at the end of the term
providing you make each repayment when it is due
- Offers you a choice of repayment periods so that you can vary
the monthly payments to meet your circumstances
It is important with a repayment mortgage that you take out separate
life assurance and critical illness cover, to ensure that your mortgage
is paid off and will provide financial protection in the event of
critical illness or death, for you and your family.
Interest only Morgage:
These require payments, which cover the interest but make no reduction
to the capital amount. The lender will require repayment of the
total borrowing at the end of the agreed loan term.
What this means is that interest is charged on the whole balance
for the life of the loan rather than on the reducing balance of
a Repayment Mortgage.
However it is the responsibility of the borrower to ensure that
when repayment is due they have sufficient funds to repay the borrowing.
Unless you have the means, or will have the means to when the time
is due, to repay the loan, you will need to set up some form of
investment product to build up sufficient funds to cover the amount
borrowed.
The types of investments usually available are:
- ISA’s (Individual Savings Accounts)
- Endowments
- Pensions
It is the customer’s responsibility to ensure that an adequate
repayment method is in place, and is maintained, throughout the
term of the mortgage. Failure to maintain funds to repay the loan
may result in the loss of the home at the time repayment is due.
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