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What are the different methods of Mortgage Repayment?

What are the different methods of Mortgage Repayment?

Just as there are different types of Mortgages; there are also different methods of repaying that mortgage. There are four different ways of repaying your loan. These are repayment, interest-only, and a combination of repayment and interest-only.

Capital repayment

On this type of repayment, every month you pay the interest on the money you’ve borrowed, as well as repay the capital sum (the amount you borrowed). The benefit of capital repayment is that you can see the mortgage reducing each year. You are guaranteed to repay the debt at the end of the mortgage term, as long as payments are maintained.

On a capital repayment mortgage, the shorter the term of your mortgage, the bigger the monthly payment will be. As with everything, there are Pros and Cons. Pro – you may benefit from a lower monthly payment by having a longer term. Con – you will pay more interest to the lender over the term.

You will need to balance this up with the mortgage term that makes the monthly payments affordable. Think about how soon you want to be ‘mortgage free’ ?

Interest only

If you opt for an interest-only loan, your monthly payments will only cover the interest on the mortgage balance. The capital sum will remain the same and will need to be repaid at the end of your mortgage term.

This means you will need a separate investment or combination of investments to generate the capital required. Also, you will need to prove that you can afford to do this. The value of investments can go down as well as up and you may not get back the original amount invested.

For an interest-only mortgage, the lender will need to see your plan for repaying the loan when the interest-only period ends. If you fail to generate enough to repay your mortgage by the end of the mortgage term, you may be forced to sell your property.

Part repayment/part interest-only mortgage

You can combine both interest only and repayment mortgages, usually for a set period each for the duration of the mortgage. Some lenders offer 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. Each lender will have different rules about this.

Have a Repayment strategy in place

Lenders will make sure you have a repayment strategy in place, so that you’ll have money to pay off the capital at the end of the mortgage. Lenders have different criteria, but a suitable repayment plan is likely to mean paying regularly into savings or investments and could include pensions and other properties.

If you use an investment plan, it’s your responsibility to be sure it is on track to pay off the capital at the end of the mortgage, but your lender will also review the amount at least once during the mortgage term. 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 you have an interest-only mortgage. If you have a substantial deposit and are considering an interest-only mortgage you might want to get financial advice to work out the best repayment method.

This article is intended to provide a general appreciation of the topic and it is not advice.

To get in touch with our Mortgage Adviser for a fee free advice, please call us on 01252 416516 or email us at info@peepalmortgages.co.uk. Alternatively, you can also reach out to us via our FacebookInstagram & Twitter.

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Your home/property may be repossessed if you do not keep up repayments on your mortgage.

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