If you want to buy a house, what do you do? You look through a series of mortgage loans. What kind of a mortgage should you select? That would depend on how much you are hoping to borrow and on the rate of interest that you would be able to afford. Generally speaking, the greater the period of the loan, the lesser will be the rate of interest that you will end up paying.
As far as types of mortgages are concerned, there are two significant types. On the one hand we have the repayment-only mortgages. On the other hand, we have the interest-only mortgages. Let me explain these two concepts to you.
Now, repayment-only mortgages consist of two types of repayments. When you decide to take a repayment-only mortgage, you will be repaying monthly installments of both capital and interest. At times, it may seem as though you are paying back a lot more than you would in other types of mortgages. Well, my advice to you would be not to worry too much about it. The only reason that you seem to be paying more is because you are repaying not just the interest but also parts of the capital.
This brings us to the topic of interest-only loans. How does this work? Well, if you had been paying attention to the mortgage markets a few decades ago, you would have heard of the concept of endowment mortgages. If you have no idea what an endowment mortgage is, let me enlighten you.
An endowment mortgage is a type of interest-only mortgage which requires the borrower to invest in an endowment fund or some other kind of life assurance policy. Thereafter, the borrower is required to pay only the interest that accrues on the mortgage. The capital is paid off by the endowment fund. Of course, this has its bad points, for the fund's performance is influenced by market conditions. In the case of the endowment mortgages in the United Kingdom, these flaws were revealed when the markets collapsed in the 1990s. At the time, a lot of mortgagers had to suffer because their funds performed abysmally, leading to losses for all.
Today, endowment mortgages are no longer popular. However, other kinds of more stable, interest-only mortgages continue to be in use. Should you go in for a repayment mortgage or an interest-only mortgage? In my opinion, that is a matter of choice. Both types have their own advantages and disadvantages. Do exhaustive research and see specific mortgages before you make your final decision.
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