Repayment Mortgages Explained
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When you’re buying a new home, the most popular type of mortgage available is a repayment mortgage. This is different from buying a buy-to-let property when interest-only mortgages are usually preferred. With a repayment mortgage, you gradually pay off the loan so that you own your home outright at the end of the mortgage term. As interest is charged on an always decreasing amount, you pay less overall than if you were to choose an interest-only option.
At Trinity Finance, we have unrestricted access to the mortgage market. Once we’ve discussed your mortgage needs and situation, we’ll search for the best repayment mortgage deal to suit your requirements. Our mortgage brokers will then negotiate for the best rate and terms on your behalf with the lender. In this guide, we’ll explain what a repayment mortgage is, how it works, its advantages and disadvantages, the types of repayment mortgages to choose from as well as the differences between a repayment mortgage and an interest-only mortgage.
What is a repayment mortgage?
When buying a home rather than an investment property for buy-to-let purposes, a repayment mortgage is the most common option. With a repayment mortgage – also known as a capital repayment mortgage – you repay some of the capital each month, which is the amount you’ve borrowed, as well as some of the interest charged on your loan. As long as you keep up with your monthly payments, you’ll have paid off your entire loan by the time your mortgage term ends. A mortgage term is usually about 25 years although you can opt for a shorter or longer term depending on your circumstances. As each payment you make reduces your mortgage balance, the interest is charged on a gradually decreasing amount. The exception to this is when you first start making payments as you’ll mostly pay interest, which we’ll explain below.
How does a repayment mortgage work?
During the first few years of your mortgage term, your monthly payments will be used to pay a higher proportion of interest than capital. Don’t be disheartened by this. Whilst it seems like you’re barely denting your mortgage loan, this pattern will eventually shift. Your payments will then have a higher proportion going towards repaying the capital and less towards the interest. You’ll notice that your loan balance starts to decrease faster than in those first few years. As long as you then maintain your mortgage payments, you’ll be mortgage-free by the end of the term.
Types of repayment mortgages
There are different types of repayment mortgages to consider. Our mortgage brokers can discuss each of these with you to ensure that you choose the right one for your needs. The types of repayment mortgages include:
With a fixed-rate mortgage, the interest rate you pay stays the same for a fixed term, which is usually 2 to 5 years. This means that your monthly payments will stay the same throughout the term. This not only helps you to budget for your monthly expenses but gives you peace of mind that your mortgage payments won’t increase each time the base rate does. Once the fixed-rate term ends, the interest rate will revert to your lender’s standard variable rate unless you switch to a new deal.
Standard variable rate (SVR)
Lenders set their own SVRs and they tend to be higher than other types of interest rates. As these rates are variable, this means that they can fluctuate as interest rates go up and down. Whilst you’ll benefit from lower payments if the rate goes down, bear in mind that you’ll have to pay more if the rate goes up.
This is another type of variable-rate mortgage. The interest rate tracks the Bank of England base rate and increases or decreases accordingly. You pay a fixed percentage on top of that interest rate. As the rate for a tracker mortgage is variable, your monthly payments can go up or down. You can either have a tracker rate for an introductory period, such as 2 to 5 years, before switching to the lender’s SVR or for your entire mortgage term.
The interest rate for a discount mortgage tracks your lender’s SVR but is set at a lower percentage for a set period, such as 2 to 5 years. Therefore, whilst your payments can increase or decrease as the SVR changes, you’ll pay less with the discounted rate than you would if you paid the SVR. Once the set period ends, your rate will revert to your lender’s SVR.
As another type of variable-rate mortgage, one with a capped rate means that there is a limit to how much the interest rate can increase. So although your payments can fluctuate, the rate you pay won’t exceed the cap. As this gives you a bit more security, the interest rate tends to be higher than that for a mortgage with a tracker or discounted rate.
With an offset mortgage, the rate can either be fixed or variable. Your savings account is linked to your mortgage and the balance of your savings is offset against the loan amount. This reduces the amount of interest that’s payable. For example, if your mortgage loan is £300,000 and your savings balance is £20,000, the interest is charged on £280,000. This flexible mortgage option allows you to either shorten your mortgage term or reduce your monthly payments. The rate of interest charged for an offset mortgage tends to be higher than that for a standard mortgage.
Get expert advice on repayment mortgages
For more advice on repayment mortgages, get in touch with our expert mortgage brokers on 01322 907 000. Based throughout Kent, London and Edinburgh, they can discuss the different types with you to help you choose the most suitable one for your needs. When you’re ready to proceed, they’ll find the best repayment mortgage product for your circumstances and requirements. They’ll also ensure that you benefit from the best rate and terms available for your chosen mortgage deal. Your dedicated mortgage broker will oversee the mortgage application process from start to finish, ensuring a smooth and successful outcome.
At Trinity Finance, we can help you with other aspects of the home-buying process too. For example, we can recommend a solicitor if you don’t already have one and guide you on the types of surveys available. We can also arrange your home insurance and mortgage payment protection insurance. For further details on the range of financial services we offer, send an email to us at email@example.com. If you prefer, send an enquiry to us via our contact form. One of our mortgage and protection brokers will reply to you as quickly as possible with more information.
What’s the difference between a repayment mortgage and an interest-only mortgage?
A repayment mortgage
When you have a repayment mortgage, you repay some of the capital each month as well as the interest that’s charged on it. As such, this makes your monthly payments more expensive than if you had an interest-only mortgage. However, as you’re repaying some of the capital every month, the mortgage loan gradually decreases. This means that the interest is calculated on a decreasing amount each month and the interest payments gradually become lower too. At the end of the mortgage term, the loan is completely repaid, provided that you keep up with your mortgage payments. This gives you peace of mind that you’re no longer in debt and you own your home outright. This is the most common type of mortgage for residential properties.
An interest-only mortgage
As the name suggests, when you have an interest-only mortgage you only pay the interest that’s due each month. None of the capital is repaid, which means that an original mortgage loan of £300,000 will still have a balance of £300,000 in 5 years’ time. The capital is repaid at the end of the mortgage term and this is usually done in a lump sum. As you’re only paying the interest, your monthly payments are a lot cheaper than they would be for a repayment mortgage. However, the interest is calculated on the entire loan amount each month. This makes the total payable over your entire mortgage term much more expensive.
Interest-only mortgages are popular with landlords who buy investment properties for buy-to-let purposes. They’re not very common for residential properties, however, as they pose a higher level of risk for lenders. The exception to this is if you want to apply for an interest-only mortgage later in life, such as a retirement interest-only mortgage.
When the affordability of a repayment mortgage looks out of your reach and you want an interest-only mortgage for your home, speak with one of our mortgage brokers. They can check whether you meet the strict lending criteria and approach a lender on your behalf accordingly. You’ll need to have a repayment plan in place that’s approved by the lender.
Can a repayment mortgage and an interest-only mortgage be combined?
You can combine these two types of mortgages in a part and part mortgage. You repay some of the capital each month as well as the interest charged on it. However, you don’t repay as much capital as you would with a repayment mortgage. This makes your monthly payments cheaper than a repayment mortgage but higher than an interest-only mortgage. As you’re repaying some of the capital each month, the outstanding loan amount at the end of the term will have decreased. However, as there will still be a balance, you need to provide your lender with a repayment plan.
The advantages of a repayment mortgage
As well as repayment mortgages being commonly offered by lenders for residential properties, there are various other advantages:
- Each time you repay some of the capital, the equity in your property increases. This will help you to secure a better rate if you wish to remortgage in the future. It will also make it easier for you to secure a new mortgage.
- As you are reducing the loan balance each month, you are at less risk of negative equity.
- As your monthly interest payments are calculated on a decreasing loan balance, you’ll pay less overall than for an interest-only mortgage.
- At the end of your mortgage term, the loan will be repaid in full, provided that you keep up with your monthly payments.
- You will own your property outright once your mortgage term has ended, assuming that you have maintained your monthly payments.
The disadvantages of a repayment mortgage
As with any type of mortgage, you need to consider all of the aspects. Here are the disadvantages of having a repayment mortgage:
- Your monthly payments are higher than for an interest-only option because you’re repaying the capital as well as the interest.
- In the first few years, the interest portion of your payments will be much higher than the capital portion. This means that your loan balance will decrease very slowly during this time.
- If you have to move home near the start of your mortgage term, you’ll more than likely need to take out a new repayment mortgage for a similar length term. This is because hardly any of the loan will have been repaid at this point so you’ll still require a long term, such as 25 years, to be able to afford your monthly payments.
Secure a repayment mortgage for your residential property
When you’re ready to get started with your repayment mortgage application, just give us a call on 01322 907 000. Our mortgage brokers – located throughout Kent, London and Edinburgh – have unrestricted access to the market. This means that they can find the best repayment mortgage deal for you. They are highly skilled in arranging repayment mortgages even if you have complex circumstances, such as being self-employed or with a bad credit history.
At Trinity Finance, we also offer a range of financial protection services. These can give you peace of mind that you, your property and your loved ones are financially protected should the unexpected happen. For example, we can arrange home buyers protection insurance, put critical illness cover in place and arrange life insurance for you. For more information, simply email us at firstname.lastname@example.org or send an enquiry via our contact form. One of our mortgage and protection brokers will reply to you as quickly as possible with further details.
Yes, some lenders allow you to do this provided that you meet the strict lending criteria. This includes having a repayment plan in place. Interest-only mortgages have much stricter eligibility criteria than repayment mortgages as they pose a higher risk to lenders. You may find an interest-only mortgage appealing, however, if you need to reduce your monthly payments. If you want to change from a repayment mortgage to an interest-only one, get in touch with our mortgage brokers for expert guidance. They’ll check your suitability for an interest-only deal and also advise you on the alternatives available. For example, you may prefer to extend your mortgage term instead. Some lenders agree to a temporary switch to an interest-only deal to help you get back on your feet if you’re finding it hard to meet the monthly payments.
Switching from an interest-only option to a repayment one
You can also switch from an interest-only mortgage to a repayment mortgage. This will enable you to start paying off your mortgage loan. Just be aware that the monthly payments will be much higher as you’ll be paying both interest and capital. As such, you’ll need to meet the affordability criteria to proceed with this.
Another option is to consider a part and part mortgage, which combines elements of these two mortgage types. This ensures that you repay some of the capital each month but at a lower amount than for a repayment mortgage so that it’s not as expensive. Just like a repayment mortgage, interest is added to the capital so it’s more expensive than an interest-only mortgage.
There isn’t a specific type of insurance for a repayment mortgage but you can take out financial protection should the unexpected happen and you’re unable to make your mortgage payments. For example, you may be injured or suffer from a serious illness, preventing you from working. Another example is that you have a joint mortgage but your partner passes away and you suddenly find yourself liable for the full amount each month. Our mortgage and protection advisers can guide you on the range of financial protection products we have available. These include mortgage payment protection cover, life insurance, critical illness cover and income protection, among others.
Yes, lenders usually allow you to make overpayments. This is a good way to reduce the loan amount that’s owed if you have extra funds to spare. Just check with your lender first as some set limits as to how much you can overpay. For example, some lenders let you overpay by up to 10% of the outstanding loan balance annually. Also, check that you can make these overpayments without being charged a penalty fee.