Mortgage advice from your IFA – How mortgages work

Mortgage Advice

For most people the only way to buy a house is by taking out a mortgage loan which is paid back with interest over an agreed period of time.

It is secured against your home and this means that the lender can take the property back if it needs to recover its money.

Never forget a mortgage is a debt and must be repaid. Also bear in mind that the quicker you repay it the less interest you pay. Work out your total payments over a 25-year period and then work out how much you would save by shaving five years off the mortgage term. It’s quite a bit and would go straight in to your pocket.

Mortgages are available either directly through a lender (bank or building society) or via a mortgage broker whose job it is to look for the best available deals to meet the customer's needs. Some brokers will select from a limited number of providers, while others will scour the entire marketplace.

The first decision you will have to make will be choosing between the two main ways of repaying the mortgage loan: interest only and capital and interest (often called repayment).

Interest-only mortgages

As the name suggests, repayments will only cover the interest being charged on the “loan” a person has taken out to buy the property. The actual sum borrowed remains the same and a separate investment vehicle will be required in order to eventually pay off the loan, otherwise you will end up with a big debt at the end of the term.

The principal appeal of interest-only loans is that the monthly payments are usually substantially lower than a capital and interest product taken out for the same amount. This can make it appealing to people with limited spare cash but can be a false economy in the long term.

This is because at the end of the mortgage term – usually 25 years – borrowers will need to have a lump sum available to pay back the loan “capital” (the original sum borrowed) in one go. Failing to do so –as the adverts continually warn us – could mean you end up losing your home and all the interest payments will have been for nothing.

Capital and Interest mortgages

In contrast, capital and interest mortgages mean higher monthly repayments but at least you're paying off the overall debt as well as the interest payments so there is some peace of mind. Every time a payment goes out of your account you will know you are gradually reducing the amount of money you owe.

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