How mortgages work

How mortgages work ?

A mortgage is a loan taken out to buy property or land.

When it comes to getting a mortgage your personal needs and preferences are unique. For this reason, it’s good to know how mortgages work generally. It’s also good to have an idea of what options might be available.

A mortgage is a loan that’s taken out to buy property or land. Mortgages can run for as long as 40 years. Most commonly however, mortgages run for 25 years. A mortgage’s repayment length is known as its “Mortgage Term”.

Mortgages are secured against the value of the property you’re buying. Mortgage lenders charge interest on the money you borrow. The higher the mortgage interest rate, the more you pay in interest. The quicker you can pay off your mortgage, the less interest you’re likely to pay.

There are a few different ways to repay your mortgage. The most common repayment methods are:

Repayment Mortgages

Each month, your repayment consists of both interest charged on your mortgage and an additional amount that’s used to reduce your mortgage balance. During the early years of your loan, your monthly payment consists of mostly interest. However, as the loan starts to get repaid, the interest being charged becomes less. Which means more of your monthly payment pays off the mortgage.

With a repayment mortgage, the longer the mortgage term, the lower your monthly repayment. However, because it takes longer to pay off the loan, when you have a longer mortgage term, you will pay more interest. As a result, a longer term mortgage will cost more over the full term of the mortgage.

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Interest Only Mortgages

With an interest-only mortgage, the length of any mortgage term you choose makes no difference to the amount you pay each month. That’s because you’ll only be paying off the interest being charged, not the mortgage amount borrowed. With an interest-only mortgage, you normally need to have a separate savings plan set up used to repay the amount borrowed at the end of your mortgage term.

Mortgage Interest Rates

Getting the right type of mortgage interest rate could save you money. It can also guarantee that your payments will not increase for several years.

Fixed interest rates are higher on average but could save you money if rates rise because your interest stays the same until the fixed term ends.

Variable, discount and tracker rates are often lower but could go up. Here is how to decide which type of interest rate is right for you.

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