A mortgage allows a person to raise significantly large amount of money for buying a house. This method makes it possible for the masses to hope for the home ownership during their lifetime. For first-time home buyers, mortgages can be confusing as there are several mortgage solutions out there on the UK market. Let us understand the three types of mortgages that are most popular among UK residents.
- Repayment Mortgages – They are known as repayment mortgages because the borrower pays both the borrowed amount and the interest rate at the same time. They are the most preferred choice among first-time home buyers. They are further subdivided into two types:
- Fixed Rate mortgage – The interest rate on this mortgage stays fixed during the entire term. This type of mortgage is risk-averse and one can easily plan finances for the duration of the mortgage because the exact amount to be repaid every month is known to the borrower.However, fixed rate mortgages come with a higher rate of interest and they are fixed only for a certain period of time. Therefore, borrowers should consider this factor before opting for this type of loan.
- Variable Rate – In this mortgage, the interest rate varies throughout the term of the mortgage. Interest rate can go up or even come down depending on the market conditions as dictate by BOI (Bank of England) base rate. If you have some experience with the interest rate and are sure that they will stay within limits, you can opt for this mortgage. However, it is best to seek an expert advice.
- Interest Only Mortgages – In these types of mortgages, you only pay interest on the mortgage amount that you own to the provider. In this mortgage repayment plan, you are not paying back the borrowed money, but only the interest. Many people may be interested in these kinds of mortgage solutions depending upon their financial circumstances.
If you have spare money that you can invest in something that grows with time, you should be in a position to pay back mortgages when required.
Depending on the way the interest-only mortgage will be paid at the end of loan term further categorizes them into endowment mortgage and pension mortgage.
Endowment mortgage utilizes the amount that is saved by the borrower in some endowment policy over a set time period. As the amount of endowment policy is invested in stocks and shares, so there are considerable chances of the money growing in value over a period of time. However, there are equal chances of losses if the endowment fund does not perform properly.
In pension mortgage, the pension amount is used for clearing off the balance mortgage balance. Around 25 percent of the pension is now available tax-free for each borrower. This pension is due to the contribution of employees and employer over a working life of the borrower. Therefore, by using pension funds, borrowers can easily repay their mortgage amount at the end of its term.