Best Mortgage Deals
Advice, help, information and guidance on the best mortgage deals available

Best Mortgage Deals UK - Explained

best mortgage deals by AnnaI hope by now that you have a better idea of where property prices are likely to be heading in the next few years - now we can start to look at where to go for the best mortgage details, but first I would like to explain the types of mortgages available, and how they work in principle. Many people don't, and are often advised incorrectly even by their financial advisors.

Personally I prefer to make my own decisions, and then if there are any problems later, I only have myself to blame! In simple terms there are only two types of mortgage available to you in the UK, namely a repayment mortgage and an interest only mortgage. So let's look at the first of these, the repayment mortgage.

Best Mortgage Deals - Repayment Mortgages

Until the early 1980's repayment mortgages were the only way you were able to finance a property purchase, and were considered to be the safest form of finance by the lenders. With a repayment mortgage you are paying off both the capital borrowed and also the interest on the loan, so that each monthly payment actually contains two elements - a capital element and an interest element. In the early years most of your payment is made up of interest, so that if you looked at the amount of capital repaid after 5 years say, you might be surprised to find that it's still zero, and you still owe the same amount of capital as when you started! I've created a small graphic which I hope explains how it works.

best mortgage deals repayment mortgageThe left hand 'x axis' represents the total amount borrowed which is composed of two elements, the interest in purple, and the capital in red. The bottom 'y axis' represents the time in years remaining. In this example I have taken 25 years but it could be any period, so we start at 25 years and work our way down to zero ( hurrah!). The purple line of the graph shows our repayment profile as the years pass, so in the early years we are paying mainly interest, with very little capital being repaid. However, once we reach the point where we have virtually paid all the interest, the speed we are repaying the outstanding amount, which is now all capital, increases sharply, and the graph becomes almost vertical. This is why, when you receive your annual mortgage statement, you will find in the early years that the capital amount you owe will stay virtually at the same amount as you borrowed, and will only start to reduce once you have been repaying for several years - in other words as you approach and cross the point where you have paid off all the interest. I hope the above helps to explain how the repayments work, as many clients find this very confusing.

The single greatest benefit of a repayment mortgage is that you can be sure that at the end of the term, you own your house and there is nothing left to pay - period!! 

Interest Only Mortgages

When I first got married, many years ago, interest only mortgages didn't exist. The only option we had to find the best mortgage deals was a repayment mortgage. How times have changed!  With an interest only mortgage, your monthly payments only cover the interest due, making no payment towards the capital, and so, without a suitable means of repaying it, you will always owe the same amount, assuming interest payments are kept up to date throughout the term. So no matter how long you make your monthly payments, you never, ever, repay any capital. The buy to let market has adopted them with relish, as they offer a way to finance a mortgage as cheaply as possible, thus preserving the relatively low yields of the rental market, which I will cover in more detail shortly. The reason that interest only mortgages have become so popular is simply this - the monthly payments will always be less than for a repayment mortgage as you are only ever paying the interest element. For example if you had a 25-year, £100,000 mortgage at six per cent interest, it would slash your monthly payments from £644 a month to £500 - a saving of £1728 a year. With rocketing house prices, an interest only mortgage is the only way many home buyers have been able to afford to get on the property ladder. However, interest only mortgages have several inherent dangers as follows :

1. The lower monthly payments encourage you to look at larger mortgages

2.  The assumption is that the capital can be repaid later from appreciation in the value of the property

3. The capital is never repaid 

Now the problem with these mortgages is several fold. Firstly you never pay off any of the capital, just the interest, so if you kept the mortgage for 25 years, you would still owe the same amount of capital as when you started. Secondly, they encourage over borrowing, and in effect this is what they were designed for, since the premise was that if you couldn't afford a repayment mortgage then an interest only mortgage provided an alternative. Thirdly, it assumes that the value of your property will increase so that when you sell, the equity in your house ( the part of the property that is yours ) will be sufficient to pay of the original capital - a very dangerous assumption indeed, particularly with falling prices at the moment. This is one of the principle reasons that the market will slump in the next 2-3 years as prices fall, interest rates are held, the economy enters recession and soaring costs in food and fuel nibble away at the monthly budget. So, apart from all the dangers,  is an interest only option the cheaper alternative to consider for the best mortgage deals - let's take a look and see!

Best Mortgage Deals - Costs of Interest Only vs Repayment

Let's take a simple example and see which offers the best mortgage deals. If we go back to the example above of £100,000 borrowed over 25 years at 6%, which is the cheaper in the long term?  With the repayment mortgage you would repay a total of £193,290 over the 25 years which would be composed of the original £100,000, plus £93,290 in interest. If you borrowed the same amount on an interest only mortgage this would have cost you £ 150,000 over the 25 years, just in interest payments, but you still owe the original capital of £100,000. So the total cost would be £250,000, or £56,710 more expensive than the repayment mortgage. So is an interest only mortgage really the best deal in the long term - the answer is no!

I hope the above has provided some food for thought - financing property is not necessarily about finding the best mortgage deals, it's understanding the implications. So let's start by looking at interest rates and the most popular ways these are offered in the mortgage market.

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