Mortgage Advice

A mortgage for a property will probably be the biggest single loan (or investment, depending on the way you look at it) that you’ll take out in your entire life. It pays therefore to do some ‘mortgage homework’ before you even start out looking for a property. The smallest variation in interest rates can have a dramatic long term effect on the amount of money you end up paying for your property.

The information that follows is merely intended to give you an overview of mortgages, their terminology, and other issues that can end up costing you money in the long run. Any mortgage provider worth their salt should have a printed publication full of detailed information and FAQ’s that they can offer prospective mortgage hunters. If yours doesn’t, then move on to the next mortgage lender. And don’t sign up for any mortgage until you are 100% happy with the conditions and the interest rate of the mortgage. This is probably the biggest financial investment you’ll ever make – don’t jump into it lightly.

Main Types of Mortgages

• Annuity Mortgage (or Repayment Mortgage)
• Interest Only Mortgage
• Endowment Mortgage (or Interest-Only Mortgage in U.K.)
• Revolving Mortgage (or Current Account Mortgage)

Annuity Mortgage (Repayment Mortgage)

An annuity mortgage is the most common form of mortgage available to individuals and couples. The borrower agrees to a fixed term for the mortgage, say 30 years, and makes repayments on the mortgage each month until the term is finished. The interest on an Annuity Mortgage, or repayment mortgage, is normally calculated on a daily basis and, unless a fixed rate is agreed, will fluctuate depending on market conditions.

For each instalment that the borrower makes against the outstanding mortgage amount, the payment is comprised of two separate parts – part of the payment goes to paying off the principal (the original money that was borrowed), and part of the payment goes to paying off the interest that the principal has attracted. At the start of the loan, most of each payment that you make goes to paying off the interest as opposed to the principal. This is essentially because you owe more money at the start, therefore you attract more interest (another good reason to borrow as little as you possibly can). As the term of the mortgage progresses, more and more of the monthly payment amount goes to paying off the principal, and less on the interest. For example, if a mortgage were taken out over 20 years, it wouldn’t be unusual with a repayment mortgage that barely a third of the mortgage was paid off in the first half of the term, but two thirds of the mortgage paid off in the final half.