Having a mortgage doesn't have to mean the end of your savings.
The word mortgage is derived from Old French words that literally translate to dead pledge. Some say it is like the wedding vow “till death do us part” as you can be locked in it for a lifetime. Others compare it to a marriage without all the matrimonial bliss. They say it is a morbid commitment but a necessary evil to get ahead. Whatever are your thoughts, choosing the best mortgage can be a life saver. Whether you are an existing mortgagor or in the market for a new mortgage, the right type of mortgage can assist in freeing up your cash flow and save you money.
What is a mortgage?
A mortgage is a legal agreement that facilitates the placement of a lien on a borrower’s property, as a means of security, by a creditor or bank who lends that borrower a specified sum of money. This specific sum of money or the total amount borrowed is called the principal. The interest is the cost paid for borrowing the principal. A mortgage becomes null and void upon the repayment of the total amount outstanding to the creditor or bank.
What are the different types of mortgage?
There are three (3) basic types of mortgage available. Based on how each mortgage operates, you can choose which is most suitable for your current situation. These mortgages can be used as a tool to free up your cash flow, save money and redirect funds to other purchases.
PRINCIPAL AND INTEREST MORTGAGE
The principal and interest (P&I) mortgage is the standard and most frequently undertaken mortgage by borrowers. It features steady repayments that cover both the principal and interest outstanding in any payment cycle. Although this is typical it tends to be one of the most expensive options as both principal and interest must be satisfied. However, with each repayment the principal is reduced and as time goes by your overall debt will be minimized. This allows you to repay the mortgage in a prescribed timeframe and free up cash and save money down the road. A borrower can usually select from fixed or variable interest rates or a combination of both with this type of mortgage.
Pros
Standard and most frequently used mortgage.
Steady repayments to reduce the principal and minimise debt over time.
May allow you to have an offset account to help reduce the monthly payments
Cons
One of the most expensive options due to higher repayments to satisfy both principal and interest.
Potentially limits spare cash available
INTEREST ONLY MORTGAGE
The interest only (I/O) mortgage is the most cost-effective option for borrowers. It features repayments that only cover the interest portion of the mortgage. In each payment cycle only the interest is satisfied, and the principal remains constant. This mortgage is favoured by investors as spare cash could be used towards further properties investing in other assets such as shares. A borrower can usually select from fixed or variable interest rates or a combination of both with this type of mortgage.
Pros
Most cost-effective mortgage which frees up cash and save money in the short term.
Lower repayments as only the interest portion of the mortgage is satisfied.
Cons
No reduction in the principal.
REVERSE MORTGAGE
The reverse mortgage exists where the equity in your property is released but no repayments are required. This mortgage is often used in an emergency where there is an urgent need for cash. This type of mortgage is primarily used by property owners who have all their wealth tied up in their house and have little to no money for daily living expenses. This mortgage offers a quick reprieve and is due for repayment after the house is sold.
Pros
Frees up cash and saves money immediately
No repayments required with the outstanding amount settled after house is sold.
Cons
Large debt to be repaid as the outstanding interest is added to the principal amount borrowed.
Reduces or eliminates the amount received after the sale of your property and repayment of the mortgage.
Final Word
Before deciding on the best mortgage that will allow you to free up cash and save money, ensure careful consideration is given to your current situation. The Principal and Interest Mortgage is the standard that frees up cash and save money in the long term. The Interest Only Mortgage is most cost-effective and frees up cash and save money in the short term. When the Principal and Interest and Interest Only mortgages are used with a fixed interest rate you can accelerate your savings. The Reverse Mortgage offers quick reprieve and frees up cash immediately. Now which mortgage will you choose to free up cash and save money?