How to Understand Mortgages


When dealing with mortgages, you should always consult at least one independent financial adviser, but preferably several. The mortgage market is very competitive and there are so many different deals available nowadays that the choices can be bewildering. An independent financial adviser will be able to tell you whether you are currently paying too much for your mortgage and whether you can save money by switching to a different lender.

Basically, mortgages tend to fall into one of two categories: ‘repayment’ or ‘interest-only’. With a repayment mortgage, your monthly repayments pay off two different things: one portion pays for the interest that has accrued over that month, and what is left goes towards paying off the sum you originally borrowed (known as the ‘capital’). In the early years of your mortgage, a large part of your monthly repayments will be used up paying off the interest, but as you pay off more and more of the capital, the interest part reduces and more of your monthly repayments will go towards paying off the capital. What this means in effect is that, with a repayment mortgage, you can be sure that your loan will be completely paid off when the mortgage term ends.

With an interest-only mortgage, your monthly repayments are used solely to pay off the interest that accrues each month, and nothing is used to pay off the original sum borrowed. This means that repayments are lower, but it also means that at the end of the term, you will still owe the full amount you originally borrowed.

There are various ways of paying off your interest-only mortgage. One way is to make a separate investment that will pay off the outstanding balance at the end of the term. Until recently, endowment policies were popular for this purpose. With an endowment policy, you make monthly payments into a plan: some of it is used to insure your life for a particular sum (usually the amount of the mortgage), and the rest is invested, with the intention of the investment growing enough to pay off the mortgage at the end of the term. However, with falling interest rates and poor performances in the stock markets over recent years, the value of many endowment policies has fallen and many people have found themselves having to make up a shortfall at the end of the term. For this reason, many people have turned away from endowments and have sought other ways of paying off their loans. It is therefore essential that you seek qualified independent financial advice if you have an endowment or interest-only mortgage.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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