Other than retirement and education, one other major investment you’ll probably ever make in your life is buying a home. Because most of us can’t afford to buy home properties upfront, we’ll have to consider the different types of residential mortgages available in the market.
Interest-only vs. Capital Repayment
In the UK, there are two main types of repayment structures to choose from which include:
- Interest-only mortgages – As the name implies, this type of mortgages require you to pay only the interest during the term. It means that the capital is never paid off, only the cost of the loan which means that you’ll have to pay the loan in one lump sum by end of term.
- Capital repayment mortgage – With capital repayment, on one hand, your debt including the interest are calculated over the loan term which means that your monthly repayments cover the entire loan. By the end of term, you’ll owe nothing to your lender.
There is another type that is a mix of the interest-only and capital repayment features but it’s not commonly offered in the market. The more recommended option is capital repayment. Though the monthly repayment is larger, it is a better option and more favorable option since you won’t anything by end of term.
Fixed vs. Variable
Once you’ve settled with capital repayment as the better choice, the next big step is to choose between fixed or variable rate mortgages. Most mortgage loans fall into these two categories of interest rates. Fixed rate mortgages mean that you interest rate is fixed but only for a short-term special deal which may be 3, 5, 7 or 10 years.
Variable rate mortgages, on one hand, have rates that vary from time to time. It may move higher or lower depending on the volatility of economy in the UK. Interest rates generally go higher when the economy is experiencing growth while it goes down when during downturns. This type of interest rates is further divided into three choices which include tracker, standard variable rates and discounts. Make sure to weigh the pros and cons of each category when finalizing your decision.