Principal and interest loans
When you want to buy a home, you need to get a handle on the financial options that may be available to you. If you're already an owner-occupier, you could have equity in your home that will mean a profit when you sell it, paying off the principal loan but leaving you enough money to put down a deposit for another property. If you're looking to get onto the first rung of the housing ladder you'll need a deposit that could be quite substantial. The deposit percentage of the sale price will depend on which lender you choose, so it's worth shopping around to get a deal that suits your financial situation.
What are principal and interest loans?
When you take out a loan for a property, you receive a lump sum to buy it. This goes to the seller, who will pick up the costs of the estate agent and their solicitor, whereas you will have to pick up the costs of a surveyor and your own solicitor. You could consider asking a lender to add these costs into the overall loan if you are a little short of ready money because you've put down a deposit. Remember, you will be charged interest on paying those fees as well as for the principal loan.
How do principal and interest loans compare to other similar products?
Buying a house is probably going to be the biggest purchase you will make in your lifetime, however many times you do it, and mortgage companies work to offer you better rates than if you went to a bank or tried to take out a large loan from somewhere else that would charge much higher rates. That doesn't mean that you shouldn't talk to banks – it's you who will decide on what the best and most affordable offer is. Finance companies want your business, so take the time to explore offers and deals.
How do repayments work for loans?
Most home loan repayments are made up of a mix of paying interest on the principal loan and making a contribution to paying off that principal. At the end of the loan term, you will be the owner of the property outright. The loan could take many years to pay off, which is what you would expect, but it depends on your circumstances and what stage you're at on the property ladder. You can choose a variable interest rate, where your payments could increase or decrease according to interest rate movements, or a fixed rate where you know exactly what you pay every month. You could also choose to split between fixed and variable – a split rate. Interest only repayments may be offered, but you won't pay anything off the principal loan with this, so you need to consider how you will repay that at the end.
What are the risks and rewards involved?
If, for whatever reason, you fail to keep up payments, your home could be repossessed; however, if you make your mortgage payments as you should you will eventually be the proud owner of a property worth much more than you originally paid for it.