MortgageAnalyser

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Types of mortgage

Repayment

This is the most common type of mortgage. Well, I say that but I've no idea really - it's just based on the fact that everyone I know either has, or wished they had, a repayment mortgage.

The basic premise is that over the term of the mortgage, you pay it off, so you come out of it owing nothing. The payments are calculated so that each month your mortgage payment covers the interest and whatever is left over reduces the capital.

If you are paying off a 107000 mortgage off over 25 years at 10%, in the first month, only a measly 80.64 of the original loan is actually being repaid. The rest of the money is disappearing into the stonking great interest payment. However, you now owe 80.64 less for the next month, so the interest for that month will be slightly less. The interest payment is lower but you are paying in the same amount, so you will be paying off slightly more of the capital - a whole 68p more, in fact (you repay 81.32 as opposed to 80.64 for the month before). And so it goes on - each month you pay back a bit more of the original loan because you are paying a bit less interest. By the end of the term, you are only paying 8.03 in interest and you are paying off a whacking great 964.28 of the original loan.

And so, after 25 years you owe them nothing. Rejoice!

Interest only / Endowment

Endowment mortgages were popular in the 90's, when all you needed to make money were red-rimmed spectacles, a stripey shirt and an ability to shout meaningless jargon into a mobile phone the size of a house brick.

The way it works is like this; with an interest only mortgage. you pay the interest on your loan every month (as with a repayment mortgage), but you don't repay the loan itself. Rather, you invest in a savings scheme (your endowment) that will be worth the same amount as your loan by the time the mortgage term is over. After 25 years you still owe the bank the original amount you borrowed. But, the theory goes, by investing the money that you would otherwise be paying the loan off with, you can end up with a nice lump sum that not only pays off the original loan and, if you are lucky, can actually be worth more than the loan - giving you a little bonus.

There is only one problem with this theory. It's bollocks. In order to actually be cheaper than a repayment mortgage, it relies on people in stripey shirts earning you enough interest on your endowment to pay off your loan. The misguided optimism of the mortgage lenders in the 80s and 90s led to many people having a shortfall in their endowments 20 years later. They had to pay extra into their endowments in order to just break even.

Nowadays, you can still get interest only mortgages, but the banks don't tend to do endowment mortgages. If you don't mind owing the bank exactly the same amount of money after 25 years as when you started, this is the one for you.

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