What is the best mortgage type?
It is a common debate among homebuyers about which mortgage option stands out as the most beneficial. Many agree that the ultimate mortgage scenario would involve purchasing the property outright with no need for any loan.
There are two basic types of mortgage:
a repayment mortgage, sometimes known as a capital-and -interest mortgage
an interest-only mortgage
What is a repayment mortgage?
With a repayment mortgage, the borrower makes monthly payments to the lender. Each payment includes two parts: one pays off the loan (capital repayment), and the other covers the interest. If the interest rate goes up, the monthly payment also goes up.
The repayment is calculated so that it remains consistent and evenly spread throughout the mortgage term, ensuring that if interest rates remain stable, the monthly payments stay the same. However, in the event of fluctuating interest rates, the monthly repayment amount may increase or decrease accordingly. Alternatively, the mortgage term can be adjusted, either extended or shortened, to accommodate these changes.
The relative proportions of capital and interest fluctuate over the course of the loan terms. Initially, in the early stages of borrowing when a significant portion of the principal amount is outstanding, the bulk of the monthly payment services the loan's interest. As time progresses and more of the principal sum is settled, the interest component diminishes, allowing a greater share of the payment to be allocated towards reducing the principal. In another word, you are paying of the interest of your mortgage first then the equity of the house later As long as all payments are met promptly and adjustments are made to accommodate shifts in interest rates, the mortgage will be fully settled by the term's conclusion.
If the borrower passes away before the mortgage term ends, it remains essential for the repayments to be honoured, or alternatively, the entire loan amount must be settled. To safeguard against this potential scenario, borrowers are advised to secure life insurance cover to ensure these obligations can be fulfilled.
What is the Interest-only Mortgage?
An interest-only mortgage is basically the monthly payment made to the lender solely to pay interest on the loan . The capital amount are still outstanding and will not be reducing at all. This type of mortgage, the monthly payment usually is lower than repayment mortgage however the borrower still has to repay the original amount borrowed at the end of the mortgage terms.
when an interest-only mortgage is taken out, the two main issues to be addressed are:
putting in place a funding mechanism to repay the debt
ensuring there is protection in place to repay the debt should the mortgagor die before the end of the term
Mortgage interest options
Speak to a mortgage advisor for the most suitable type of mortgage for you. According to your risk profile and circumstance, you might be need insurance and protection to make sure the loan will be payout if you should die before the end of the term. If your have children you might be a look at 1-2 insurance cover for them. The best way to find out is to speak us, the mortgage saving experts | the mortgage finder.