Mortgages

Unless you're fortunate enough to have the purchase price in cash, you'll need a mortgage. In fact as mortgage interest rates tend to be cheaper than other forms of finance getting may be advisable even if you do have the full price in cash if you can get a relatively cheap deal and have other plans for the money.

For most people their mortgage is the biggest financial commitment they undertake in their entire lives, both in terms of the sum involved and the period over which it is repaid.

The good news is that the mortgage market is highly competitive with numerous lenders vying to finance your home with all kinds of mortgage deals, though current conditions may be a little harder than recently as a result of the American sub-prime crisis and the ensuing "credit crunch".

Types of Mortgage

The highly competitive mortgage lending market has led to a huge range of choices for consumers. While this is a good thing in keeping costs low the sheer volume of options available can be bewildering.

Repayment v Interest Only Mortgage

With a repayment mortgage each payment made covers interest plus capital repayment. In the early days the bulk of each payment goes towards interest. As the term progresses so the proportion of capital repaid increases.

With an interest only mortgage (investment backed mortgage) the entire sum is borrowed for the entire term. Mortgage payments consist solely of interest on the debt. The intention is that in addition to the mortgage payments the mortgagor also funds an investment(s) with a view to accumulating sufficient capital to repay the mortgage at the end of its term.

For most people a repayment mortgage is probably the best choice. The total interest paid is lower and it guarantees that, provided payments are kept up to date, the mortgage will be repaid at term end.

More interest will be paid with an investment backed or interest only mortgage, and it carries the risk that the investment(s) will not have grown sufficiently to repay the debt at term end. There is, of course, the chance that the investment value will exceed the mortgage debt thus providing a cash bonus, but there is no guarantee of this. Interest only mortgages may be suitable for those who expect their earnings to increase in future, and given the historically high cost of housing may be the only means of securing accommodation for an increasing number.

But beware! There has been a major scandal in the U.K. over the mis-selling of endowment mortgages, which has left many short of the funds needed to repay their mortgages.

This author believes in a "horses for courses" approach to money management with mortgage repayments, savings, investments, insurance etc each being handled separately so that each may receive the optimal approach appropriate to its purpose. Shelter is such a basic need that it should not be placed unnecessarily at risk thus a repayment mortgage is favoured in most cases.