Mortgage lenders can offer a variety of different mortgage types to suit people in particular financial situations. Many of them can be beneficial for your personal circumstances, but you must be aware of the potential drawbacks to each type. This is what will be discussed in this article.
We understand that choosing the right mortgage for you is a complicated and time consuming affair. Here at PPS Chartered Accountants, we can guide you through every step of the mortgage process, from choosing the best deal for you to providing all the necessary documents to the lender to finalise the deal.
Interest-Only Mortgage
An interest-only mortgage is the only loan type which does not operate on the repayment principle at all. Instead, all you have to do is pay the interest on the loan each month.
This means that for a while, you won’t be having to pay large sums each month. However, when the contract comes to an end you have to be sure you can pay the entire loan sum in full. The lender will ask to see your accounts before they decide to give you the funds for this reason.
If it turns out you cannot pay back the loan when the time comes, you may be forced to sell your home. Luckily, there are plenty of other ways to repay the mortgage. You can switch to a repayment mortgage to pay it back monthly, for example. However, you can see that this will end up costing you more money overall compared to if you started with a standard repayment mortgage to begin with.
High-Percentile Mortgage
This mortgage loan type is offered to those who cannot pay a sufficient deposit (usually 10% of the value of the property) for the house at the start. This will provide some relief for first-time buyers and others who cannot afford a home otherwise.
Still, to compensate for this the lender will have high interest rates on the monthly repayments.
Flexi Mortgage
Flexible, or “flexi” mortgages have the benefit of allowing you to repay less on some months, or skip payment entirely. This gives piece of mind to those that are self-employed or others who do not have a steady source of income.
The disadvantage is much the same as several other mortgage types on this list: a higher interest rate than the more basic offerings.
Offset Mortgage
Offset mortgages are a desirable option for those with high annual incomes.
You only have to pay interest on the difference between your savings and the mortgage loan amount, which sounds great until you realise that the interest rates are quite a bit higher than other loan types.
Nevertheless, by tying your savings to the repayment of the mortgage, you will only have to pay tax on the difference between your savings and the loan amount, recuperating a lot of the lost funds.
Cashback Mortgage
Much like with cashback credit cards, cashback mortgages give you money back each month on the loan.
In the short-term, you may save quite a bit of money as you will get money back on removal fees and other costs when moving house.
But this comes at an often greater cost of higher average interest rates, which means that this method of repayment usually ends up costing more money overall.
Buy-To-Let Mortgage
Those who are purchasing a property with the intention to rent it out to other people will have a completely different set of rules when it comes to repayment of a mortgage loan.
Clearly, buying to let in itself has many advantages, such as providing a steady source of income with the current high demand for properties. However, the lender will take these into consideration when calculating the terms for repayment, often with higher interest rates considering the monthly rent cost of the house.