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Mortgages - The Basics
What is a Mortgage?
A mortgage is simply a long term loan secured against the value of a property.
The term "Secured" means, if for any reason you are unable to keep up with your payments on the loan, the mortgage lender can repossess your property to sell. The lender would do this in order to recover his initial outlay (money it lent you).
Although we think of a mortgage as nothing more than a loan, selecting one is often a confusing matter as there are numerous ways of paying the interest and repaying the initial loan amount.
It is important to do as much research as possible on the different types of mortgages.
Different Types of Mortgages? Interest or Repayment?
In essence there are two types of mortgages, (Although please note there are many variations of these).
A repayment mortgage is when a payment is made to the lender, paying of the interest and the principal amount borrowed. At the end of the agreed mortgage term, when the amount borrowed plus the interest is fully paid off, the property is yours. This does mean however, payments made during the term are higher than an interest only mortgage (see below). This is still the best way to ensure that the property is yours at the end of the mortgage term.
An interest only mortgage is when a payment is made to the lender, paying only the interest. No payment is made on the principal amount borrowed. The principal amount borrowed will have to be paid in full at the end of the mortgage term. or upon sale of the property, which ever happens first. It is best to set up an investment fund with monthly contributions for the term of the mortgage. The idea is that the fund would have grown large enough to pay of the initial amount borrowed at the end of the mortgage term. There are many investment funds you could use, so again it is essential to do your research. However, you are strongly advised to seek advice from an Independent Financial Adviser before making any commitments.
How Much Can I Borrow?
Two main factors determine how much you can borrow:
- The value of the property you wish to purchase.
- How much you earn.
A good start is to calculate how much disposable income you have left every month after all taxes, bills etc have been paid. Remember to take into consideration changes that may occur in the future, when deciding how much to borrow. For example, interest rates may rise, the property prices fall, or you lose your job.
You could normally borrow up to 3 times your salary, although these days there are lenders who will allow you to borrow 6-7 times of salary, depending on your affordability. This can work well when interest rates are low and property prices are increasing. But think carefully what can happen to your financial situation if the interest rates were to increase and property prices start falling.
The Length of a Mortgage?
The typical term for a mortgage is 25 years. Although it is now becoming more common too see terms of 15 years and 20 years.
The reason and advantage anyone would want a shorter term is that the loan is taken for a shorter period which means overall, less interest will have to be paid on the capital borrowed.
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