Mortgages – An Introduction

___________________________________________________________

A mortgage - the loan you take out from a lender to pay for a property - is probable one of the largest debts you will have in one go.If you are looking for a mortgage in today’s market place, you may well be completely bewildered by the wealth of options out there (there are around four thousand mortgage packages available at the moment!) but don't panic. This can only be a good thing in view of getting a competitive deal, and despite all the jargon, most mortgages are simply a variation on a few types.

There are TWO main varieties of mortgage: Interest only and Repayment (or capital). Your mortgage is divided into two parts, the money you originally borrowed for the property (capital) and the interest the lender charges on the loan.

____________________________________________________________________________

Interest only mortgages

____________________________________________________________________________

An interest only mortgage is one where none of the capital is actually being repaid directly, only the interest on the loan is. The idea is that, as you make your mortgage repayments towards the interest, you should be paying simultaneously into an investment fund. At the end of your mortgage term, this fund should hopefully have grown enough to pay back the capital and even leave you with extra cash. If you take this type of mortgage, your lender will normally offer an investment product into which you can make your payments, but you are under NO obligation to accept it- you can shop around for the best deal- using an ISA has a tax advantage over others.

Endowment mortgages were a popular type of interest only mortgage but have since fallen badly from grace. Whichever type of interest only mortgage you choose, make sure you consult an IFA for the investment part.

____________________________________________________________________________

Repayment Mortgages

____________________________________________________________________________

This is the only way in which a property is actually guaranteed to be yours at the end of your mortgage because you pay a little towards the capital with every payment (what doesn't go towards the capital goes towards interest) until the whole debt is paid.You will pay a bit more every month towards this type of mortgage, but you will be eating into the actual debt, not just interest, and you will not need a separate investment scheme to pay off the property.

There are also 'part repayment, part interest only' mortgages, which are a combination of the two.

____________________________________________________________________________

Interest repayment

____________________________________________________________________________

For both types of mortgage, there are various ways of paying the interest. They all work off the base rate of interest that is set by the Central bank of India. These are:

• Fixed Rate
• Variable Rate
• Capped Rate
• Discount Rate