When you’re looking to buy a property, chances are you won’t have the cash available to cover the entirety of the asking price. What you will have is a proportion of that price as a deposit and will look to take out a loan in the form of a mortgage. An agreement will then be made with the lender to repay the debt, with interest over an agreed period of time.
There are two types of mortgage you can apply for as a potential borrower, interest only and repayment. Which option you take is dependent on your individual circumstances and what is best for you.
This article focuses on repayment mortgages only.
What is a repayment mortgage?
A repayment mortgage is probably the most conventional and widely available method of repaying a mortgage. It means you can pay back the capital (loan) and the interest together and the loan amount will gradually reduce over the term. Your monthly payments to your lender will therefore be made up of both capital repayment and the interest on your loan.
The capital to interest ratio will vary throughout the term of your agreement (but your monthly payment amount will stay the same). It is important to note however, that in the early part of the term your payments will mainly be interest. This means that if you look to move a few years later the amount you owe won’t have reduced by much.
Note: when deciding on which mortgage option is best for you, you will also have to decide whether you opt for fixed or variable interest rates.
As an example, let’s say you took out a mortgage at £200,000 with a term of 25 years and an interest rate of 2%. Assuming your interest rate stayed the same your total repayments by the end of the term could amount to £254,357 (based on £848 monthly payments). Looking at the amount of debt over time, in year one your remaining balance would work out to be £193,772. This means that out of the £10,176 you have repaid, only £6,228 went towards the capital repayment (£3,948 towards the interest repayments). However, between year 19 and 20 you’ve paid £9,107 on your loan, taking your loan down to £48,370. This means that out of the £10,176 you paid that year £1,069 was for interest.
The good news though is that at the end of the term of the agreement you will own your house outright and the lender will have no further interest in your property (providing all payments have been met).
What are the benefits of a repayment mortgage?
- It’s simple and easy – an interest only option means you need to find the full loan amount at the end of the term as you would have only payed the interest on it. However, with a repayment mortgage you are paying the interest and loan off with every payment you make. Meaning, that at the end of the term you will owe nothing else to your lender and you’ll own your house outright.
- You pay less interest in total – Although you may be paying more interest on the loan at first, as it gradually decreases you will pay less on interest and more on the loan. This is because the monthly interest is calculated on the amount you still owe on your mortgage.
- Keep payments low – by extending the loan term you can keep your payments down. As there is flexibility in repayment mortgages some lenders will stretch their terms from the standard 25 years to 30.
- Lower deposit requirements – lenders will generally lend up to 90/95% of the property value depending on your circumstances. However, these higher loan to value mortgages are more readily available on repayment options rather than interest only. A lot of lenders won’t accept anything less than a 25% deposit on interest only mortgages.
How can I calculate what my repayments are likely to be?
You need a good mortgage calculator. A good one should take into account the loan amount, loan type, interest rate, term length and your individual circumstances.
Online calculators are a great way to give you a rough idea of the repayments you can expect to make. Our online tool is a free mortgage calculator that you can use to give you a rough estimate on your mortgage payments. Just bear in mind that online tools can only offer a rough guide even the best ones may not factor everything in.
A specialist mortgage advisor can provide you with the most accurate calculations and whole-of-market brokers will be able to secure you the best deals.
Can I make overpayments to help reduce my outstanding balance?
In short yes. Overpayments can help reduce your debt quicker and reduce the amount you repay in total as it means less interest will be accumulated overall.
However, always check with your lender if this is an option as some lenders have overpayment penalties.
If I’ve taken out an interest only mortgage can I switch to repayment?
There are lots of reasons you might consider switching to a repayment mortgage and it is possible to do so.
You should talk to your lender in the first instance as you may find you can switch keeping the same deal and interest rate.
It might also be worth talking to an advisor who will look around at options as you may get a better rate.
How a mortgage advisor could help
We know that helpful and insightful advice can put your mind at ease at a time that could be stressful and daunting.
Mortgage advisors will help borrowers understand their options and will also match lenders to their clients based on their personal circumstances. A lot of them are a whole of market brokerage, so will have access to high street lenders right through to specialist lenders.
Rather than trawling the high street and agonising over your choice, you could save time and potentially a large amount of money.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via firstname.lastname@example.org and we will put you in touch with a suitable specialist to handle your enquiry.