When you encounter the mortgage market, it’s a confusing experience. There’s much use of terms like capping, repayment mortgages, trackers, APRC and a whole host of other bewildering jargon. But when you’ve grasped the basics, mortgages really aren’t so hard to understand, as this guide aims to illustrate.
There are two essential components to any mortgage. The first is the capital, this being the sum of money you borrow to buy your new home. The second component is the interest, which is the money charged by your mortgage lender as payment for the service of providing the capital.
Capital is quoted as a fixed sum of money, whereas interest is always charged at a percentage of the amount borrowed. This percentage is known as the interest rate. Since it’s the interest rate which accounts for most of the cost of taking out a mortgage, it’s important to secure a deal that represents good value to you.
The first thing you should think about before applying for a mortgage is the kind of repayment scheme you prefer. You have two choices: put your monthly repayments towards paying off the interest and the capital, or just repay the interest. If you choose an interest-only mortgage you’ll need to work out how to repay the capital, which will become due at the end of your mortgage term.