Mortgage Repayment Types
When it comes to mortgage repayment types, there are two options of capital and interest or interest only. However, in some situations, lenders will allow you to combine the two methods.
Repayment Options:
Capital & Interest
A capital and interest mortgage works the same way as most types of loan. You make regular monthly repayments to the lender; the repayment is made up of capital (repaying the amount you initially borrowed) and interest. Provided you keep up the correct payments, at the end of your mortgage term you will have repaid the loan in full.
The longer the period you borrow over, the more interest that you will pay overall. This is also true of Interest Only and Split mortgage described below.
Interest Only
With an interest-only mortgage, as the name suggests, you only pay the interest charged by the lender. This means you need to some way to save the money to pay off the capital at the end of the term. There are a few main ways to do this:
- Endowment policies
- ISA’s
- Pension plans
- Other Investments
- Lump-Sum Overpayments
- Sale of Property in the future
Most investment vehicles used to pay off the loan are not guaranteed to make enough money to do so. This could mean that there is a shortfall and you would therefore still have a debt outstanding at the end of the term.
There are other ways in which you could repay an interest-only mortgage i.e. if you were buying a property to let out, you could sell the property at the end of the term and repay the mortgage that way. Additionally, some lenders will allow you to take an interest-only mortgage (without repayment product) and convert it to capital and interest at a later date.
Since the Mortgage Market Review in April 2014 the ability to take an interest mortgage has been severely limited as it was felt that too many mortgages being taken had inappropriate or unrealistic means to achieve full repayment.
The exception to this is Buy to Let mortgages where interest only is fully accepted by the lenders.
Combination
Sometimes lenders allow you to combine both repayment methods.
If you have any questions or would like to find out further information regarding mortgage repayment methods, contact us today for mortgage repayment advice.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up the repayments on your mortgage.
FAQs
What mortgage repayment options are there?
There are two types of mortgages – Capital repayment mortgage and Interest-only mortgages.
With a capital repayment mortgage, your monthly payments will include repayment of some of the capital borrowed, plus interest. At the end of your mortgage term, you should have paid off the initial amount borrowed.
Interest-only mortgages require you to pay only the interest on the amount you borrowed for the term of the mortgage. At the end of the mortgage term, you will still owe the full amount that you borrowed, and you will need to have a plan in place to pay this amount off.
If you’re unsure which type of mortgage is best for you, please give us a call and we can help you make your decision.
How are mortgage repayments calculated?
The amount you will have to pay monthly will be influenced by the amount that you want to borrow, repayment method and the length of the mortgage term selected. Also of course the interest rate agreed with your lender will impact the payments too.
Is it better to repay your mortgage or save?
As a general rule if your savings rate is higher than that payable on your mortgage then it would seem to be a good idea to put extra money into your savings account.
However, overpaying a small amount off the mortgage monthly can shave time off the mortgage and save a considerable amount of interest over the term. Many mortgage schemes have early repayment charges, however there are usually concessions that allow you to overpay within a certain limit, so that penalties are not payable as a result of overpayments.
There are several; factors to consider though (other than just interest rates)), as individual circumstances can vary so much. Therefore, it would be prudent to seek the advice of a mortgage or financial adviser, to get a personalised plan.
Can I get approved for a mortgage? Getting approved for a mortgage can be a stressful process as it is one of the most important steps in the home buying or remortgaging procedure. Here at Stuart Brown we are available to help you through the process of gaining approval for a mortgage and can offer you expert advice before you submit your application.
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