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Different types of Mortgage

Choosing which type of mortgage is right for you is absolutely crucial, as getting this wrong could lead to financial disaster in the future. You need to work out how much you can afford to pay back, and when.

The two main types of mortgage you will come across are the interest only mortgage and the repayment mortgage, although there is another specific type known as the endowment mortgage; a close relation of the interest only mortgage. What sets these mortgages apart from each other is the way in which you pay for them. Below is a little information to help you define them.

Repayment mortgages

Repayment mortgages are generally the most expensive in terms of how much you are likely to pay back monthly. This is because you will be paying for the interest on the mortgage, as well as a portion of the mortgage loan.

However, despite this there are some distinct advantages this has over the other types of mortgage. Each month you will be writing off a small portion of the debt you owe to the lender, and when you reach the end of the term you will not owe any more money, and the property will belong to you. This makes repayment mortgages generally quite uncomplicated, and people seem to consider them less risky.

Interest only mortgages

Interest only mortgages require you only to pay back the interest on your loan every month. This means that they are generally cheaper to pay off on a monthly basis than repayment mortgages, but you will not be reducing the amount you actually owe to your provider.

Due to this it is imperative that you set up some other type of investment vehicle alongside your mortgage in order to make sure you are saving to pay off the loan when the mortgage term finishes. For example, you would put what you are saving by not paying for a repayment mortgage into an ISA on a monthly basis, and by the time your mortgage ends you would have enough saved to pay for your property outright.

There has been a great deal of concern in recent years about interest only mortgages in terms of borrowers’ abilities to pay off the outstanding balance at the end of the mortgage term. People have been choosing to borrow on an interest only basis, not fully understanding that they must raise the capital required to buy the property by the end of the mortgage term. This has led to a string of complaints about this type of mortgage

Endowment mortgages

Endowment mortgages are those where your money is invested by your lender into their chosen funds in order to make sure you have the money you require in the future to pay for your property when the mortgage term is over.

Effectively, you are paying a monthly premium for life assurance that will be paid back to you on a specified date in the future. However, the main problem with this type of mortgage is that there is a distinct element of risk attached to it. Because your money is invested by your lender, there is the possibility that your investment may not perform well, and this could leave you short of the money you need to pay for your property. In the past there was a major mis-selling scandal linked to endowment policies where consumers were not informed of the risks when they took out the loan, and this meant that their popularity fell dramatically.

Need more help and advice?

At we recognise that mortgages can be very confusing, and offer a range of help and advice for you to help you make the right choice when choosing which type of mortgage is right for you. Simply contact one of our advisors for help with your mortgage query.

Our team of mortgage advisors can help you with any mortgage queries you have, from finding you a lender, to giving you advice on your current deal. We deal with the whole of market, meaning we are able to find the best deal for you, and not just a compromise from a limited number of providers.

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