When you’re buying your own home, deciding which mortgage to get can be incredibly difficult. Not only do you have to choose between countless lenders and interest rates, there are also a few different types of mortgage to choose from.
Today we’re going to run through two of the most common types of mortgage - interest and repayment mortgages.
What are repayment mortgages?
Repayment mortgages are widely considered the default type of mortgage and the option most people go for. They typically refer to repayment mortgages and involve borrowing the capital and paying interest on this capital until it’s all paid off.
Once the capital and interest has been paid off, you’ll own the home. This type of mortgage is great for those who wish to have manageable repayments each month and settle down into their home without taking on too much financial risk.
What are interest only mortgages?
An interest only mortgage involves paying just the interest owed for a specified period of time, rather than paying off the capital too. This makes monthly repayments lower than they would be with a repayment mortgage. However, once the mortgage term is up, the capital must be paid.
In some cases, the mortgage holder may sell their property in order to pay off the capital. If the property’s value has risen since it was purchased, a substantial amount of money could be made. However, this certainly isn’t a risk-free approach. If property prices fall by the time the homeowner comes to sell, they can be at risk of negative equity and may need to find the rest of the money borrowed through other means.
Since interest only mortgages are often higher risk than traditional repayment mortgages, they’re often harder to obtain. Borrowers usually have to pass stricter lending criteria before their application is approved.
Which type of mortgage is best for me?
The best type of mortgage for you will depend on your own personal circumstances and your financial history.
If your primary reason for buying a home is your desire to settle down and own your home outright once your mortgage has been paid off, a repayment mortgage might be the best option for you.
If, however, you want to keep your repayments low and increase your chances of making a large investment, an interest only mortgage could be for you.
Before making your decision, it’s wise to speak to a mortgage broker about your options. Your broker will assess your current financial situation before pointing you in the direction of the mortgages most suitable for you. They’ll also help you overcome any financial or credit obstacles you might have. For example, if you have a less than perfect credit history, your broker will point you in the direction of the lenders most likely to approve your application.
To learn more about working with a broker and to find out how the team at TaylorMade can help you, please get in touch
