Buying a house is a lengthy, stressful process. Just when you think it is all over, and before funds are released to your solicitor, your lender will ask how you want to structure your mortgage. You will no doubt have had little time to consider this and yet the structure of your mortgage can have significant financial implications. Mortgages vary in terms of how repayments are made and how the interest rate is set. There are three basic types of mortgage:
- Table mortgage. This is the most common type of mortgage, on which you repay both the principal and interest over a fixed period. You can have a floating interest rate or fix your interest rate for a period of time, giving you certainty of what your repayments are. Fixing can lead to penalties if you repay your mortgage earlier by increasing your repayments or paying lump sums.
- ‘Interest only’ mortgage. With this type of mortgage, you pay back only the interest for a fixed period of time. This is useful if your mortgage repayments are very high, if you have a sudden loss of income, or if you are buying an investment property.
- Line of credit, or revolving credit. This type of loan works a bit like an overdraft. You are required to pay the interest owing on the balance of the loan each month. The interest rate is floating. You can reduce the amount of interest you pay by keeping your savings in your line of credit.
You can divide your mortgage into two or three different amounts with a mixture of types of mortgage and with table mortgages fixed for different periods. Your bank or mortgage broker can help advise you on the best structure, but don’t leave it until the last minute!