Types of mortgage : Music Chat Board
Types of mortgage
The main difference between one type of mortgage and another is the manner in which it’s repaid. It’s the big drawback with all kinds of mortgage, they have to be repaid at some point!
The traditional way to achieve this is to pay each month a payment that comprises of interest and a contribution towards the sum borrowed. That goes on all through the period of the mortgage until, all being well, when you get to the end everything is paid off and you no longer owe anything.
That’s called a repayment mortgage and is really the simplest type to manage. If it’s on a variable rate of interest and it will be at least for most of the time your monthly payments will fluctuate as the rate goes up and down but the end result will be the same. Sometimes when the rate goes up your lender may offer you the opportunity to extend the period of the loan rather than increase your payment. That just means it will take a little longer to finish paying off the mortgage.
Remortgages work in exactly the same way as initial mortgages and the same types of repayment system are available for both. If you decide to remortgage at some time during the term your new loan will simply pay off the original advance early and you start again with the remortgage.
Because remortgages are new loans of course you may decide that this time you’d like to adopt a different payment method.
You can have a mortgage that doesn’t have to be paid back until the end of the agreed term. In that case you will have to pay the interest on the loan on a regular, usually monthly basis. The advantage of this method is that because you’re only paying interest and nothing off the amount borrowed the monthly payments will be less then they would otherwise be. This is called an interest only mortgage.
If you decide this is the kind of deal for you the lender will normally expect you to make some arrangement to ensure the loan does get repaid at the end of the term. A piece of paper with the letters “IOU” scribbled on it will not usually be sufficient. It’s a lot of money and the lender will want some sound guarantee that it will be repaid.
Traditionally the way most people have achieved this is by means of a life assurance policy that guarantees to pay out a sum of money sufficient to repay the mortgage at the end of an agreed term of years, normally to coincide with the end of your mortgage term, or on your death if that should happen earlier. That way the lender gets his money back whether you survive to the end of the term or not. Sometimes bonuses applied to the policy may result in sufficient money being available to pay off the loan early thereby saving on the interest. This type of life policy is called and endowment policy hence a mortgage secured in this way is known as an endowment mortgage.
The performance of endowment policies is linked to investments in stocks and shares and the stock market in recent years has not always behaved as predicted. That’s led to there being problems with quite a large number of such policies failing to realise enough money at the end to repay the mortgage in full. This has naturally made people wary of the endowment mortgage.
The pension mortgage is simply a variation on the same theme. It’s an interest only loan just the same but it’s linked to your private pension plan rather than to an endowment policy. This is often considered more secure, probably due to the fact that most people who have a private pension plan will keep it under review year by year so that if they earn more they pay more with the intention of creating a worthwhile fund with which to buy an annuity on retirement. That means there is much less danger of there being an unexpected shortfall when the time comes to repay the mortgage.
Whichever means you choose to ensure the money’s there to pay off your interest only deal don’t forget that remortgages pay off your previous loan out of your new one so your policy isn’t affected. It can simply be transferred to cover the remortgage.
So there you have the kinds of mortgage most people will come across. You may hear other terms used but usually they refer to other specialised variations of the two main categories, repayment or interest only. If your situation calls for one of these specialise versions you’ll need the services of a first class mortgage broker. It would pay you to consult one anyway.
Author Bio
Martyn Barberry
Stirling Mortgage Network
Types of mortgage / Author: lexisclick
