Buying a house is one of the most significant life decisions many people make. Whereas it can be exciting, it often comes with many financial responsibilities, the most crucial being a mortgage. There are different mortgage types in the market, and understanding them is crucial when shopping for a mortgage. In this article, we focus on a linear mortgage, what it is, how it works, and its advantages and disadvantages.
A linear mortgage is a mortgage type where the borrower repays their mortgage loan in fixed instalments. Unlike an annuity mortgage where the borrower pays more interest in the early stages of their mortgage, the interest rates for a linear mortgage reduce as the borrower pays off their loan. The borrower repays both the principal and the interest of the mortgage in equal instalments over the mortgage term.
One of the advantages of a linear mortgage is that the borrower pays less interest over time compared to an annuity mortgage. Since the borrower repays the mortgage loan in equal amounts throughout the term, the interest rate reduces gradually. Also, the borrower has more room to budget for monthly repayments since the instalments are equal throughout the term.
Another benefit of a linear mortgage is that it allows the borrower to pay off their mortgage loan faster. Since the borrower repays both the interest and principal in equal instalments over the mortgage term, the principal reduces faster throughout the term. As such, the borrower can pay off the mortgage earlier than they would with other mortgage types.
However, one of the disadvantages of a linear mortgage is that the monthly instalments may be higher than other mortgage types. The borrower repays both the interest and principal in fixed instalments throughout the term, and as such, the instalments might be higher than other mortgage types. Also, the mortgage type may not be ideal for individuals with a fluctuating income since the instalments are fixed.