Buying a home can be one of the most frustrating and tough times in your life. It is more than likely the biggest investment in someone life, so it should always be perfect. That goes without saying a mortgage should always be the right type for you to make your dream house all round perfect.
Here in Ireland there are many different types of mortgages. One type of mortgage suits one person, a different mortgage suits others. Overall there are 6 different mortgages in Ireland:
- Annuity Mortgage (Repayment)
- Interest Only Mortgage
- Pension Mortgage
- Endowment Mortgage
- Deferred Start Mortgage
- Offset Mortgage
Annuity (Repayment) Mortgage:
What is an Annuity Mortgage?
An Annuity Mortgage is the most common type of mortgage in Ireland. This is due to the format and characteristics of the mortgage as the interest on the loan is high at the start but then gets smaller and smaller as the years go on.
So how does mortgage work? Well the lender or bank must work out the amount a payment each month will cost, to cover both the loan and the interest on top of it. The loan is the balance and the interest is then applied on top of the balance at a certain percentage rate.
At the early stages of repayments, you will be paying for the interest on the whole of the loan. (This is why the total is worked out fully before the loan is made.) As time goes on, and the interest of the loan is paid off, you will start to pay of the balance of the loan.
One of the best parts of an annuity mortgage is that you are usually able to get a variable rate or a fixed rate mortgage. A variable rate mortgage can be helpful, if you are having struggles financially, or are better off financial. If any of these two things happen, you can negotiate with your lender a better repayment scheme that suits you.
Interest Only Mortgages:
What is an Interest Only Mortgage?
Interest only mortgages are very different from Annuity mortgages. This is because when you are paying off your mortgage repayments every month, you are only paying of the interest and not a single part of the balance of your loan.
There are two types of an Interest Only mortgage in Ireland. There is:
- The Pension Mortgage
- And the Endowment Mortgage
Both of which will be talked about further down in the Article.
So how do you pay of the standing balance at the end of the mortgage if you only pay the interest?
At the end of your mortgage, say it was 20 years or maybe even longer, you will need to find the whole balance of your loan. There are two ways to do this. One of the ways to do this is to take either a Pension Mortgage or an Endowment Mortgage. The second way to do this is to sell your property. The proceeds of the sale will then need to go towards your mortgage. If you have the money, you can pay your mortgage in full.
There is always a risk with the interest only mortgage, as the price of your property could fall depending on the property market. This means you have no guarantee that you will pay of your mortgage in full at the end of your mortgage. Most lenders also only offer these types of mortgages to people who sit in a great financial position. This means not being able to pay of your mortgage in full would be very hard for the applicant.
What is a Pension Mortgage?
A Pension Mortgage can only be taken out if a mortgage applicant has a personal pension plan or a PRSA. (Personal Retirement Savings Account). It means when an applicant retires, the money they get from their pension will help pay of their mortgage.
Very similar to an Interest Only mortgage, an applicant will need to pay of their interest every month. On top of this they will also need to pay money into their own personal pension policy. This allows an applicant to then pay off the mortgage balance with their pension policy.
With this type of mortgage, a lender will usually allow an applicant to pay less than a normal type of mortgage. This of course takes into consideration if the lender believes an applicant’s pension will be capable of paying off their mortgage.
This type of pension also proves a risk to the lender and the applicant. The lender will expect the pension policy to grow enough to pay of your mortgage.
But what if this does not happen? Usually this does not happen, but sadly in some cases it does. The reason it does not happen often is because the lender will only give this type of pension to people in a great financial shape. In the cases.
If a case of this happens it will leave the applicant with a smaller income when they retire, due to the applicant needing to repay the shortfall of the mortgage.
What is an Endowment Mortgage?
An Endowment Mortgage works very similar to a Pension Mortgage. You will need to pay monthly on the interest of the balance you have borrowed, and you will also need to pay into an investment policy, which is called an Endowment Policy.
So, for the duration of your mortgage you will be paying the interest every month and the endowment policy will pay the final large payment at the end of your mortgage.
One way you can keep on top of your endowment policy, to make sure it will cover the final payment, is to stay in contact with your policy regularly. You should always keep tabs on the surrender value of your policy. This will give you a great general idea if the policy will cover your mortgage.
Very like the Pension mortgage, this type of mortgage is also a great risk. Your endowment policy will never guarantee to eb enough to pay the final payment of your mortgage. There are many ways to combat your policy not being large enough to cover your mortgage, this is one of the best differences of this policy compared to the pension policy.
You can increase your contributions to your policy. This does not guarantee that it will be enough to pay the final payment of your mortgage, but it could be a great help. You can also cash in on your policy and then take out a separate mortgage for the remainder of your mortgage. A lump sum of your endowment will be needed to be paid for this to happen.
You can also pay a lump sum if you can, extend the term of the mortgage, take out a separate savings plan to cover any shortfall or even take out a separate mortgage to cover the shortfall while still paying your endowment mortgage.
Deferred Start Mortgages:
What is a Deferred Start Mortgage?
A Deferred Start Mortgage is a Mortgage that has delay in your first repayments. This type of mortgage can delay repayments for several months, the only catch being the lender charges interest on these months without any repayments. This means you already are being charged interest before any repayments start.
This type of mortgage can be very helpful to home owners as it could allow new home owners to furnish their property and/or make improvements to their house without the headache of paying their mortgage for a few months.
One of the bad points about this mortgage is that in the long run, it will more than likely cost more. This is due to the unpaid interest for them few months gets added onto the amount you have borrowed.
With this type of mortgage, a lender may also allow their applicants to pay their mortgage over 9 or 10 months instead of the entire year. The only problem is that repayments over the number of months will be higher.
What is an Offset Mortgage?
An offset Mortgage is the final type of mortgage available in Ireland and very few lenders offer this type of Mortgage. This mortgage works as it is attached to a current account, the more money in your current account the less interest you are charged.
The current account attached to this mortgage works like a normal account. You can, deposit, withdraw and transfer money from it easily. The only catch being that if your account goes into credit, the interest on your loan will rise.
This mortgage can be a quicker way of paying your mortgage off, but it also comes with its disadvantages. If you combine your mortgage and current account additional charges may apply, so also check the small print. This is a type of annuity mortgage.
The right type of Mortgage for you:
Finding the right type of mortgage for you, might be hard. But always do research into your lenders, the small print and the properties of each type of mortgage you can apply for.
Some lenders might be more appropriate for yourself as you have been or are already a client of them. Others might be more appropriate for you because on the interest and many other factors.
Here at Eldron we will always be happy to help you if you have any questions about mortgages. We also hope to guide you through every part of the buying process, which includes gaining a mortgage.Other Useful Articles: Best Home-wear, First-time buyers advice, House Prices, Buying a Property in Dublin