What to look for when choosing a mortgage

So you want to buy a house! Congrats! 

What happens next?

The chances are, you’ll be needing a mortgage.

There are different mortgage structures – this has to do with the rules and details of your mortgage. For example the amount of time your loan period is and the interest rate you’ll be paying. 

There are also loads of options for mortgage repayment methods – this has to do with how much you’ll be paying and when.

Here’s a quick guide:

Mortgage structures

There are two main types of repayment structures. This just tells you how you’ll be making your payments.

Capital repayment: With this your monthly repayments are calculated so you’ll have repaid all the debt and the interest over the term you agree. It means your monthly payments cover both the interest and chip away at the actual debt, so at the end you owe nothing. Most mortgages these days are capital repayment.

Interest-only: Here you just pay the interest during the term. This means your monthly repayments will be significantly lower. But they don’t reduce your actual debt – they just cover the cost of borrowing that money. So for example, when the term (let’s say it’s 25 years) is up on a £150,000 mortgage, you would still owe £150,000. Interest-only mortgages are hard to get these days as you need to show a solid plan for paying back the money you borrowed.

Mortgage repayment methods

There are many different types of deals you can get, but all fall roughly into two camps. They’re either fixed or variable.

Fixed: The interest rate stays the same for an agreed period of time, usually between two and five years. This means your payments stay the same and it’s easier to predict your monthly outgoings and budget for them. 

Variable: Here your mortgage rate, as the name suggests, can and usually will move up and down. The major, but not the only cause of this, is changes to the UK economy. Whether the UK economy is doing well or not so well can affect these rates.  

The interest rates available to you will depend a lot on what’s happening with the economy when you’re looking to buy a house. The most important thing is to get a mortgage with a rate that you can afford to pay back. You’ll need to look closely at your budget to see how much per month you can realistically afford. 

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