What is a repayment mortgage?
A repayment mortgage is by far the most common way to pay off your mortgage debt.
With a Repayment Mortgage, every month, you make a single payment to your lender. Some of this payment goes to paying off the capital you borrowed, and some of which pays for the interest on your loan.
This means that at the end of your mortgage term, you will have paid off everything you owe plus interest, and own your home outright.
Most repayment mortgages are ‘front-loaded’, which means that at the beginning, the bulk of your payments go towards paying off the interest on your loan.
For this reason, it can feel like you aren’t making a dent in your balance for a long time. However, once most of the interest has been paid off and more of your repayments start going towards your balance, you will start to see your debt quickly fall away.
You can see in this example how the share of interest v. capital changes over the course of a mortgage. The mortgage used in the example is based on a 25 year, £200, 000 loan at a fixed rate of 2.5% APR.
|End of….||Interest||Capital||Total Monthly Payment|
Repayment vs. Interest-Only Mortgages
With an interest-only mortgage, instead of repaying part of the capital and part of the interest each month, you only pay off the interest. Although this means that your monthly payments are drastically reduced, when you reach the end of the mortgage term, you still owe the all of money you borrowed.
You will need to savings, earnings or another form of investment (known as a ‘repayment vehicle’) to pay off your debt. When you take out an interest-only mortgage, you will be expected to present your repayment vehicle to the lender, who can decide whether it is suitable.
The greatest risk with an interest-only mortgage is that your investment won’t pay off and so you cannot afford to repay your loan at the end of the term. If this happens, you could end up losing your home.
It is also possible to take out a ‘part and part’ mortgage, which is a combination of repayment and interest-only. Unlike a pure interest-only mortgage, you pay back some of the capital you owe during the mortgage term; but monthly repayments are still lower than with a pure repayment mortgage.
Because you pay back some of the capital over the term of the mortgage, you’ll also owe less at the end than with a pure interest-only mortgage.
How Long Do Repayments Last?
You will make payments on your mortgage over its entire term, normally 25 years. However, it is possible to take out a mortgage which is anywhere between six years to 40 years long in the UK.
The longer you borrow for, the more you will end up paying overall, because the interest on your loan has more time to grow and is more likely to be affected by rate rises.
If you borrow over a shorter time, your monthly payments will be higher but over time you will pay less in interest and you will be debt-free sooner.
How Is the Interest Calculated on a Repayment Mortgage?
When you shop for a repayment mortgage, you will need to think about how you want your interest to be calculated. Over the years, interest will make up a significant portion of your repayments, so it is important to think about how you would like this to be worked out.
Tracker, fixed-rate, SVR and variable rate mortgages all have their benefits and drawbacks.
Finding the right one for you requires you to think about your own circumstances and research the options available to you.
How Can The Mortgage Bank Help?
Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.
They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.