Types of Mortgages

For the majority of us, a house is probably the largest investment we would ever make in our lifetime. It is rare for people to buy houses with cash. Normally we would put down some deposit as down payment and borrow the rest of the money from a bank to pay the outstanding balance of the price of the house.

Aside from the house itself, many people will put some effort into getting and selecting a suitable mortgage. However, with so many types of mortgage packages out there, how do you know which package is the right package for you? Below is a quick guide of the advantages and disadvantages of the usual types of mortgages and who they are suitable for.

Fixed Rate Loan

With a fixed interest rate loan, you will never have to worry about fluctuating interest rates. You have the peace of mind knowing that your monthly repayment will always be the same no matter that happens to the economy.

Suitable for: Anyone who values the certainty of fixed cash flows.
Advantages: Ease in budgeting. You know you don’t have to pay more even when the rates hike.
Disadvantages: You don’t enjoy the interest savings when the rates fall.

Floating Rate Loan

Mortgage with rates that will fluctuate with the Base Lending Rate (BLR).

Suitable for: Any home buyer.
Advantages: You enjoy interest savings when the rates fall.
Disadvantages: When rates hike, you may have to pay higher monthly repayments. This present some difficulty when budgeting for cash flows.

Revolving Home Loan

Allows the borrower to fully redraw the amount he has paid into his loan.

Suitable for: Any home buyer.
Advantages: Allows you to tap into a line of credit that is backed by your home. Prepay as much you want to minimize interest, and redraw as much as you want when you need the cash.
Disadvantages: Interest rates is slightly higher.

100% Margin of Finance (or 110% Margin of Finance)

Enjoy up to 100% of financing.

Suitable for: People who are strapped for cash at the beginning of the mortgage.
Advantages: Zero or minimal cash outlay from you as 100% of the price is financed by the mortgage from the bank. However, you may need to pay for processing and legal fee, if it is not already included into the mortgage. The version of 110% or higher allows you to borrow more than the value of the house so you could use the excess for renovation or purchase of furniture.
Disadvantages: Because the mortgage amount is higher, the monthly repayment will also be higher. Interest rate could be higher because the bank takes on more risk without you putting down your own money.

Investors’ Mortgage / Low or 0 Lock-in-Period

Refinance or pay off your loan early without incurring penalties.

Suitable for: Investors and property flippers.
Advantages: These mortgages allow the borrower to sell the property and pay off the mortgage early without incurring any penalties.
Disadvantages: Normally higher interest rates.