REPAYING YOUR MORTGAGE

Repaying a mortgage in the UK is all about making ‘capital and interest’ or ‘interest only’ repayments.

Basically a mortgage requires repayment of capital and payment of interest on the capital.

The amount of money or loan you borrow from your mortgage lender is called the ‘capital’ and you will need to repay the whole of this back to your lender before you can transfer ownership of your house when you come to sell. 

During the time you have the loan with your mortgage lender you will required to pay ‘interest’ on the loan and you will have to pay this to your lender every month throughout the life of the mortgage until the capital is paid off in full.

Repayment Mortgage

A repayment mortgage is the standard way of repaying a home loan and involves paying interest and small part of the capital each month. This type of mortgage is therefore often called a ‘capital and interest’ loan.

The capital is gradually paid off each month so that it is completely paid back by the end of the mortgage term.

Usually the capital element of each monthly mortgage payment is small at the start of the loan and the interest payment is high. However over the years the split is gradually reversed until towards the end of the term when the capital repayment is large and the interest payment smaller.

Thus during the period of the loan the size of the loan actually decreases although gradually.

Interest Only Mortgage

Your monthly repayment only covers the interest on the loan and therefore does not pay off any capital at all.

So during the period of the loan the size of the loan stays the same and never decreases. Thus the capital will have to be paid off by some other means.

A monthly repayment on an interest only mortgage will be less than that for a repayment mortgage.

Usually you will have to separately pay into some kind of savings or investment plan, which will allow you to build up a lump sum that can be used at the end of the term to pay off the capital.

Close attention will need to be paid to the plan to ensure that the savings or investments are on track to pay off the mortgage when required. Interest only mortgages are considered risky because of this and the fact that any investment or savings may fail to produce enough money at the end.

This is especially true of stock market linked investment schemes, which will follow the trends in share prices, which can be up or down.

Typical interest only mortgages are Endowment mortgages, Individual Savings Account (ISA) mortgages and Pension mortgages.

If you are currently looking for an interest only or repayment mortgage then just give us a call and a professional adviser from one of our selected bokers will call you back.