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A mortgage is a loan taken specifically to help you buy a property. There are plenty of mortgage types to finance or refinance your property, however, mortgages are typically categorised into two main types – interest only or capital and repayment:
An interest-only mortgage is a loan secured against a property where the repayments simply service the debt. If you choose the interest-only mortgage, you are only repaying the loan’s interest. This may be for the initial years of the mortgage, or indeed for the entire duration of the loan.
The advantage of an interest-only mortgage is that it offers lower monthly payments as you are only covering the interest. However, after the interest-only term expires, the debt still needs to be repaid in full. Interest-only mortgages give you an option to pay them off at the end of the term by a lump sum. This may be from the sale of the asset or from wealth accumulated elsewhere.
Capital and Interest (Repayment) Mortgage is a popular mortgage type and a widely available traditional mortgage repayment option. With a mortgage repayment, you make monthly repayments for an agreed term until you have repaid the capital and the interest in full.
When you start your mortgage, the majority of the repayments will initially service the interest element of the loan. Therefore, if you want to repay the mortgage early or move house in the first few years, you’ll find that the mortgage balance won’t have gone down by much. As a general rule, your mortgage balance will get smaller every month and, as long as you keep up the repayments, you will repay the mortgage at the end of the term.
Other Types of Mortgages
A buy to let mortgage is a loan you can take out to buy a property you intend to rent out to tenants.
The amount you can borrow is linked to the rental income the property could earn.
Commercial mortgage loans are available for residential properties that are zoned commercial buildings.
A new commercial remortgage deal often results in lower interest rates and smaller monthly repayments, freeing up cash for other aspects of your operations.
Refinancing a mortgage means paying off an existing loan and replacing it with a new one.
When interest rates drop, consider refinancing to shorten the term of your mortgage and pay significantly less in interest payments.