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The Property Ladder: Mortgage Basics

By: James Miller

Choosing a mortgage can be hard. There are so many products available and so many good deals out there, that knowing which one is right for your circumstances can be extremely difficult.



You need to go back to the basics and re-look at mortgages and how they work. You can then start looking at the type of mortgage that best suits your circumstances and take it from there.



So, what is a mortgage? Basically, a mortgage is a loan for the purchase of a property which you pay back over a set period of time. The loan is secured against the property, so should you stop making the monthly repayments, your house can be repossessed in order to settle the outstanding debt.



While that sounds a bit scary, you should note that should you get in to financial difficulty, the key is to speak to your mortgage lender as quickly as possible so that situation can be resolved.



A mortgage typically runs for 25 years, but it can shorter or longer depending on your individual circumstances. When you take out a mortgage, the amount you borrow is called the ‘capital’. You have to repay the capital as well as the interest charged on the capital.



There are basically two ways that you can repay the capital, by a Repayment method or by Interest Only.



With the Repayment method, every time you make a payment, you are paying off a bit of the capital and a bit of the interest. At the end of the mortgage term, this means that everything will be paid off and the property is yours.



With the Interest Only method, you are doing what it says on the tin – paying off the interest only element of the borrowing. You will still need to find the capital amount at the end of the term to be mortgage free and actually own the property.



To pay off the capital amount, you will need to have some sort of investment fund. In a perfect world, by the time the interest is paid off, your investment fund should have been working really hard and have given you enough money to pay off the capital.



However, if your investments don’t perform well, you could find yourself at the end of the mortgage term with a cash shortfall that you will need to find. If you haven’t got the money, your home could be repossessed.



Therefore, do be aware that interest only mortgages can be risky if your investments fail to do their job properly.



Finally, just a brief word on endowment mortgages. These are a form of an Interest Only mortgage. The endowment element is a combination of savings, investments and life cover all lumped together in to an insurance policy.



Endowment mortgages used to work so that at the end of your mortgage term, you could almost be certain that the endowment policy would pay off the capital. However, with investment returns falling in recent years, many people will not have enough money to pay off their capital at the end of their mortgage term. They will have to find it elsewhere – or they could lose their home.



The general consensus now is that you should avoid taking out endowment mortgages and that is why there are so few of them in the mortgage market place.

Article Source: Free Content Articles Directory

More information :
www.mortgage-uk-companies.co.uk
www.mortgages-compare-mortgage.co.uk
www.looking-for-best-mortgage.co.uk

James Miller is a freelance writer specialised in consumer credit, covering topics such as how to deal with bad credit, mortgages and insurance. He aims to help people navigate the financial industry.

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