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Mortgage word cloud

If you’re looking to get on the property ladder, you may be confused with all the jargon and information regarding mortgages; whether you can even get one or not. Deciding on a mortgage is generally pretty simple. You firstly need to decide whether you require an interest only or repayment mortgage, with differences in monthly repayments depending on which you choose. And of course depending on the price of the property will usually depend on how much deposit you will require.

You will usually need approximately 10% of the value of the property to put down as a deposit. Unfortunately much of the information given regarding mortgages, deposits and repayments is confusing, but is often misleading marketing designed to sway you towards a certain lender. So it’s important to get clued up in the world of mortgages before you commit to anything.

Essentially the difference between interest only mortgages and repayments mortgages means the amount you have repaid at the end of your term would differ. For example if you take out an interest only mortgage on a loan of £100,000 you would still owe the full amount at the end of say a 25 year term, because you would have only paid back the interest accrued on the original loan.

If however, you choose a repayment mortgage, you will own the property outright at the end of the term, as you would have paid both interest and repayment of the initial loan. However obviously this option means your payments would be likely to be significantly higher.

To get an idea of how much this would be, and the difference between payments; if you took a loan for £100,000 at around 6% interest rate you would pay approximately £500 per month on an interest only mortgage and £650 per month on a repayment mortgage.

However you’re probably wondering how you would end up paying off the capital at the end of the mortgage term if you take out an interest only repayment option. Well essentially there are different methods of savings and investments used to raise enough money to pay off the capital at the end of the term. For some people they are able to make several investments that aim to pay it off quicker or see a larger return on their savings. This could potentially mean that the £150 you save on your mortgage repayments could give you a larger return in the long run. Stocks and shares, ISAs and profit funds are just some ways in which people invest their money.

It’s not easy making the decision between an interest only or repayment mortgage, as you are either opting for higher monthly payments which are obviously safer, or alternatively the potential to invest wisely and pay off your capital in other ways. Either way it is extremely important that you speak with a qualified mortgage advisor or financial advisor who are regulated with the Financial Services Authority, who can help you make the right decision that suites your circumstances.

by Cormac Henderson

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