Mortgage Repayment Types
There are three different mortgage repayment types. In this guide we explain the differences between them and provide you with as much information as possible to allow you to make an informed decision when taking out your next mortgage.
Repayment methods
There are three different ways of repaying your loan. These are repayment, interest-only, and combination of repayment and interest.
With Alexander Southwell Mortgage Brokers, you have a choice of payment methods.
We will recommend and advise you on which is going to be most suited to you.
A mortgage consists of the capital sum and interest, expressed as a percentage.
What is capital and interest?
Mortgage affordability calculator will help you make sure you can afford your monthly repayments.
You pay back the capital and the interest together and repay the capital at the end of the mortgage term.
With an interest only mortgage, you initially only pay back interest on a monthly basis.
What is a repayment mortgage?
A repayment mortgage is a home loan where you repay a bit of the capital and some interest each month.
As long as you meet all your monthly payments you’re guaranteed to have repaid your entire loan by the end of the mortgage term.
The amount you pay each month is calculated so that you pay off the full amount owed.
You will own your property outright once your mortgage is paid off.
We will compare mortgages you, let you know what your repayments on your mortgage will be, compare interest rate and let you know which option are best for your property investment.
This graph shows how your mortgage decreases throughout the term. As you can see, the capital doesn’t decrease a lot in the first few years and then speeds up towards the end.
Interest Only Mortgages
Interest-only mortgages you only pay the interest due on the amount you borrowed each month. You don’t pay off any of the loan amount.
This means if you are unable to pay off your mortgage & you still owe the lender at the end of the mortgage term you risk your house and it may be repossessed.
This means monthly payments will be less than if you had a repayment mortgage.
Total cost of an interest-only mortgage will be higher because you’ll be paying interest on the full loan amount throughout the mortgage term.
It’s your responsibility to make sure you have enough money to repay everything you owe at the end of the term.
If your plan doesn’t give you enough money you owe, you may have to sell your property.
The advantages: If the savings or investment plan you choose performs well, then you could pay off your mortgage earlier compared to a repayment mortgage. At the full mortgage term there may be a lump sum available after the mortgage has been repaid.
The disadvantages: Very few investments or savings plans are guaranteed to repay your mortgage in full. At the end of the mortgage term, you’re responsible for repaying the mortgage in full.
If your savings or investment plan doesn’t cover the full amount, you’ll be responsible for paying the difference.
Your mortgage lender can demand repayment, and they’ll charge you interest on any outstanding balance until it’s repaid.
The graph shows how your mortgage balance does not decrease throughout the term of the mortgage.
Part & Part Mortgages
Part and part. You can combine both interest only and repayment mortgages, usually for a set period each for the duration of the mortgage.
This will provide you with a lower monthly payment while still paying back some of the capital every month.
It will NOT repay the whole mortgage with these mortgage repayments but at the end of the term your balance will be lower.
Frequently asked Questions – Different Repayment Types
Paying back the capital – Repayment Mortgages
Lenders will make sure you have a repayment strategy in place.
It’s your responsibility to be sure it is on track to pay off the capital at the end of the mortgage.
If it’s not on track you will find it difficult to remortgage or switch to another lender.
Some lenders might ask for a larger deposit if they have an interest-only mortgage.
But a suitable repayment plan is likely to mean paying regularly into savings or investments and could include pensions and other properties.
Do you lenders accept an interest only mortgage?
The simple is no. In actual fact a limited number of lenders accept interest at all, the lenders will consider this option have a lot of particular stipulations attached to their products which doesn’t make it easy to get accepted for.
It is much easier getting buy to let interest only mortgage.
What To Do Next
It is always worth gaining additional knowledge around what type of product you would like and understanding the different products on offer. We can provide you with all of this information.
We also have a mortgage product guide explaining the different products which lenders offer, click here to find out more.
Free mortgage advice from AS Mortgages
We can help you with all your mortgage and protection needs, get in touch with our mortgage brokers today.
