Taking on a mortgage is probably the biggest financial commitment you are going to make, so getting it right first time is incredibly important, especially if you are looking for a mortgage after bankruptcy. It is not only a case of choosing the right mortgage product to suit your personal circumstances, it is also imperative you make sure that you choose the right repayment option too. There are two main options offered to borrowers, both of which have their own merits and downfalls.
The traditional type of mortgage is known as a repayment mortgage, and your monthly payment goes towards not only the interest on your mortgage, but also towards repaying the capital sum borrowed. This type of mortgage is preferable to most people as it means that at the end of the mortgage term the entire amount borrowed will be paid off, and there will be no lump sum to clear or re-borrow. While you will always be paying a small amount towards the capital borrowed, for the first few years of a repayment mortgage, the majority of your monthly payment will be going towards paying the interest that is charged to your account. Typically the first ten to twelve years of a repayment mortgage are more interest than capital, in fact it is only around year twelve that more than 50% of your monthly payment amount will be going towards repaying the capital.
The second type of mortgage is an interest only mortgage, and the monthly payments on this will be going purely towards the interest, with no amount being paid off the capital sum borrowed. This method does dramatically reduce the monthly payments that need to be made, however the downside to this is that the capital sum borrowed is staying the same month in month out. This means that at the end of the mortgage term, the amount your initially borrowed is still owing, and unless you know you are going to come into a lump sum of money that will allow you to repay this amount in full, then taking an interest only mortgage can be a risky option. However, many lenders realise that the first few months of home ownership can be an expensive time, and for this reason it is not uncommon to find that they offer interest only payments for a limited amount of time, for example three or six months, meaning you have a little extra free cash to help with things such as furnishing or re-decorating your new home.
There is no right or wrong type of mortgage, and the way you choose to handle your mortgage repayments is purely your choice and should be suited to your current circumstances. The most important factor when choosing your repayment type, particularly when taking out a mortgage after bankruptcy is to be sure you can afford to make them every month.