Unless you have been saving for years to purchase a house and are lucky enough to have found your dream home at a price you can afford to pay from your own savings, you will need to apply for a mortgage.
It is very important to opt for the type of mortgage and mortgage product that best suits your needs. To ensure that you find the right mortgage you will need to speak to a Bank or Building Society. They can advise you on the various mortgage products they provide or you can speak to an independent mortgage broker who will talk you through the many different types of product available from a range of Lenders.
A mortgage is a loan. There are two main types of mortgage available. These are a Repayment mortgage and an interest only mortgage. Mortgages differ from other types of loan that are available as the money borrowed is secured on property. This means that if mortgage repayments are not kept up, the mortgage lender is entitled to apply to the Court for a re-possession order on the house. The mortgage lender will sell the house and the owner of the house will have to leave. The mortgage lender sells the house to re-claim the amount of the mortgage secured upon it plus any fees associated with non-payment of the mortgage.
There are lots of mortgage products available, all with various interest rates, fees, conditions and stipulations but they are all mainly either a repayment mortgage or an interest only mortgage.
A Repayment mortgage or to give it it’s correct name, a Capital Repayment mortgage is a mortgage taken out over a fixed term – often 25 years but sometimes more or less than this depending on the borrower’s circumstances. With this type of mortgage, the amount borrowed will be paid back bit by bit to the mortgage lender each month over the term of the mortgage. At the end of the term of the mortgage the borrower will have paid the whole amount back to the Lender and will own the whole equity in the house.
A repayment mortgage may make it easier to get a better mortgage deal in the future. As the bigger the amount that has been paid off when the house is sold, the more equity is owned in the property. The equity is the share of the property that the borrower owns outright.
Interest only mortgage
An interest only mortgage is also taken out over a fixed term. Regular monthly repayments will be made to the Lender. With this type of mortgage each monthly repayment only covers the interest part of the mortgage. Monthly repayments are often less than with a Capital Repayment mortgage but this means that at the end of the mortgage term it will be necessary for the borrower to repay the whole amount borrowed to the mortgage lender. It is the borrower’s responsibility to ensure that they will have enough funds available at the end of the mortgage term to be able to do this. Mortgage Lenders and Mortgage Brokers will refer to this as a separate “repayment vehicle”.
It could be that the borrower will need to set up an ISA or similar savings and investment plan that is paid into each month to ensure that the borrower will be able to deal with this requirement at the end of the mortgage term.
It can be risky to opt for this type of mortgage as there is no cast iron guarantee that any investment made will be sufficient to pay off the capital at the end of the term.
Remember, it is very important to take professional advice from either a bank, building society or an independent mortgage broker. This will help you to decide on both the right type of mortgage and the right product.
We would recommend that you ensure you can obtain a mortgage on favourable terms before you begin your property search.
We can help
For further information contact one of our Residential Conveyancing Teams across Lincolnshire & Newark.