Different Mortgage repayment methods
There are three different mortgage repayment methods, or ways you can repay your mortgage. These are repayment, interest-only, or a combination of the two.
Mortgages have two parts:
Capital: the money you borrow
Interest: the charge made by the lender on the amount you owe
With repayment mortgages you pay back the capital and the interest together. However, with an interest only mortgage, you initially only pay interest on a monthly basis and repay the capital at the end of the mortgage term. Below we examine the different mortgage repayment methods.
Repayment mortgages are the most popular. They are widely available across the mortgage market.
When you have a repayment mortgage you’ll make monthly repayments for an agreed period (mortgage term) until you’ve paid back both the capital and the interest.
This means that your mortgage balance gets smaller every month and, if you keep up the repayments, your mortgage will be repaid at the end of the mortgage term.
You’ll need to know that early on in your mortgage the repayments will mainly be interest, so if you want to repay the mortgage early, or want to move to a new house in the early years, you’ll find that the amount you owe hasn’t reduced much.
Interest Only Mortgages
When you have an Interest only mortgages you only pay the interest due on the amount you borrowed.
Monthly payments with interest only are less than they would have been with a same sized repayment mortgage but, you’ll still owe the amount you originally borrowed when you reach the end of the mortgage term.
If you have an interest only mortgage it’s necessary to make sure you have a repayment strategy in place. This will help you find the money you need to pay off the capital at the end of the mortgage.
Lenders have different rules about repayment vehicles for interest only mortgages. A suitable repayment strategy will likely mean paying into savings or investments. This could include pensions and other properties.
Whatever investment plan you use, it’s your responsibility to be sure it is on track to pay off the capital at the end of the mortgage. Today mortgage providers also ask you to review the amount you’re saving at least once during the mortgage term.
Be careful with an interest only mortgage. If you find that your investments aren’t on track to repay your loan it could be difficult to remortgage or switch to another lender.
Larger deposits are required by mortgage providers when interest only is being used. We suggest you always seek advice to work out the best repayment method.
Combined Repayment Mortgages
Some mortgage providers will permit mortgages on a part-repayment and part interest only basis.
This option means that at the end of the term some of the mortgage capital will still be owed and will need to be repaid. Different rules apply and again we suggest you seek our advice in this regard.