Different Mortgage Types

It’s possible to learn a bit about the different mortgage types so you’re in a position to use that information to beat the banks at their own game. Once you understand how different mortgage types can affect you and your financial goals, you can then begin to repay your mortgage faster.

You see, banks really don’t like mortgage reduction plans. They like their customers to stay in debt and make their repayments on time for as long as possible. This is how they make their profits.

It’s also why some banks offer lending products that are specifically restricted and inflexible. Banks really like mortgage and other lending products with very little flexibility because they know you’ll stay in debt longer. They purposely make it difficult for clients to adjust repayments or make it expensive to repay your loan too early.

Adjustable Rate Mortgage (Variable Rate)

Most people understand that an Adjustable Rate Mortgage is charged at a variable interest rate. Your repayments go up or down in line with any interest rate movements on the money market.

Fixed Rate Mortgage

A fixed rate mortgage allows you to lock in your interest rate at a specified rate that remains the same for a fixed term. Fixed rates can be ideal for anyone on a difficult budget, or if they know the rates are likely to increase in the coming years. They’re also great for investors who need to maintain steady investment costs.

Principal and Interest Mortgage

The vast majority of mortgages are charged using a repayment calculation method called ‘amortization’. This is where the bank can calculate exactly how much interest they want to charge you in advance over the entire loan term and then they can determine how much of your monthly payment will be in the interest portion and how much will pay off the principal.

Understanding that each payment you make is made up of both principal and interest payments means that you can try to find ways to reduce your mortgage balance so you’re paying less interest and more principal whenever possible.

Interest Only Mortgage

Some banks allow investors to repay only the interest portion of their mortgage and not repay the balance owing. Many property investors elect to use these mortgages, choosing to either bank on capital gain in the property or to keep the profit generated by the rent.

Equity Loans

An equity loan is a revolving line of credit that is a little like a giant credit card. Theoretically, a line of credit could be used as an amazingly powerful debt reduction tool. Unfortunately, 95% of people who have equity loans are never given enough information to use these loans effectively and so they end up in worse trouble than they imagined.

Equity loans are charged at an interest only rate on the balance owing each month. You’re not asked to repay the principal unless you want to. This makes it very tempting for people to pay only the minimum and redraw any available equity they may have, which keeps them in debt for longer rather than paying off debt.

Unless you’re extremely disciplined with your money and able to create and maintain a very accurate budget each month, then avoid using a line of credit.