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Types of Mortgages
Choosing the right Mortgage and interest repayment to fit your lifestyle is important as you may require flexibility or you may want to keep the overall cost of the mortgage to a minimum. We all have different priorities and therefore you should assess the following options according to yours. We also recommend you contact a Mortgage Broker to discuss your options.
There are four main types of mortgages:
- Table (interest and principal) mortgage
- Flat (interest only) mortgage
- Straight line (reducing balance) mortgage
- Revolving Credit mortgage
Table (interest and principal) mortgage
A table mortgage is a loan where you spread your repayments evenly over the term of the loan. This means that at the beginning of the mortgage you are paying back mostly interest and only a small amount of principal. As you decrease the amount of the principal, the interest also decreases, which allows a greater proportion of your payment to go towards the principal. These loans can often make it a lot easier to budget.
Flat (interest only) mortgage
A flat or interest only mortgage is a loan where you pay only the interest component of the loan throughout the term. At the end of the term you pay back the principal as a single lump sum. These mortgages tend to be short term and the interest rate charged is generally higher. This type of loan allows you to keep your repayment amount to a minimum until more funds become available to repay your loan.
Straight line (reducing balance) mortgage
A straight line mortgage is where the amount of the principal you pay stays the same throughout the term of the mortgage, which means as the mortgage period progresses the interest amount reduces. With these types of loans the initial payments tend to be much higher than other mortgages, but the repayment amounts reduce quicker over the term of your loan.
A revolving credit mortgage is effectively like a big overdraft, secured against your property, in that you can draw on it and pay it back as you want. To use a revolving credit facility successfully all your income should go into the account and you only withdraw what you need. Interest is calculated daily on this mortgage, so the longer you leave the money in there, the less interest you pay. These types of mortgages often require a lot of self control.
Now you have the mortgage type that suits your needs, it is important that the interest set up does also. These mortgages allow for three different options of interest set up. These are:
- Fixed interest rate
- Floating interest rate
- Capped interest rate
Fixed interest rate
This is where the interest rate doesn't change for a set period of time. They tend to be slightly lower than the floating rate, however it may not be possible for you to make additional lump sum payments or pay off the whole mortgage during this time.
Floating interest rate
This is where the interest rate varies as your lender responds to changes in economic and monetary circumstances. Your repayments will move up and down as the interest rate changes, however you can normally make additional lump sum payments or pay off the whole mortgage at any time.
Capped interest rate
This is where the interest rate you're charged moves with the market conditions, however it can not rise over a certain specified limit, or "cap". The starting interest rate for a capped mortgage is higher than the fixed rate offered.