Repayment Options

You need to decide which option is best for you. Below we have listed some of the benefits and consequences of repayment mortgage and interest only mortgages. If you are unsure remember that our team of mortgage advisors are available to help you.

Repayment Mortgage

Repayment Mortgage Every month, your payments to the mortgage lender go towards reducing the amount you owe as well as paying the interest they charge. So each month you're paying off a small part of your mortgage. In the later years of the repayment mortgage this is reversed and more of your monthly payment goes towards the clearing the balance and less going towards the interest element of the mortgage as most mortgage lenders load the early part of the mortgage with interest.

You need to decide which option is best for you. Below we have listed some of the benefits and consequences of repayment mortgage and interest only mortgages. If you are unsure remember that our team of mortgage advisors are available to help you.

The pros: It's a simple, clear approach - you can see your loan getting smaller. Every year you should receive a statement from your mortgage lender detailing the payments you have made over the last 12 months, the interest that has been charged over this period and the outstanding balance of your mortgage. This is your mortgage repayment plan statement and should be kept in a safe place for future reference or if you plan to remortgage so that you have an accurate figure for your mortgage advisor. If you intend moving house every 2-3 years then maybe the mortgage repayment formula will not be suitable for you as a means to repaying your mortgage and you may wish to rely on the equity you have built up in the property to reduce your mortgage on sale of the property or use to borrow less on your new property. Our mortgage repayment calculator will help you with affordability calculations if you do intend to move on a regular basis so you can see how much you can borrow on a monthly basis without jeopardizing your lifestyle.

The cons: In the early years your payments will be mainly interest, so if you want to repay the mortgages or move house in the early years, you'll find that the amount you owe won't have gone down by very much. The mortgage repayment calculator will not show you this so we suggest asking your mortgage advisor for a specific mortgage illustration which will detail this for you and can also be used as your guide to your mortgage repayment tables.

Using the repayment calculator will give you an indication of your repayment mortgage monthly payments to see if you can afford them.

Interest Only Mortgages

As the name suggests, your monthly payment only pays the interest charges on your interest only loan you're not actually reducing the mortgage loan itself. The interest only mortgage calculator will give you an accurate amount of your monthly payments as long as you insert the correct interest rate into the interest only mortgage calculator. The interest only loan will be secured against your property so it is important to have a repayment plan in place. It is very important you arrange some other way to repay the loan at the end of the term; for example, through an investment or savings plan. Some people already have endowment mortgages which have seen many of them produce shortfalls in the past and still predicting shortfalls for current mortgages, if this is the case with your mortgage endowment then speak with your mortgage advisor about addressing the shortfall before it becomes to late. You can use the repayment calculator and the interest only mortgage calculator to work out the difference in payments for both and see how much the mortgage shortfall is going to cost you in real terms. Other ways you can have a repayment vehicle for your interest only loan is by your pension lump sum at retirement, ISA savings plans and other forms of saving. If you use any of the above routes for paying off your mortgage at the end of the term always use the repayment calculator and the interest only mortgage calculator and find out the difference in payments, compare this to the amount you are paying to your interest only loan and see if it is possible to convert to repayment mortgage without putting yourself in financial difficulty. If you can do this then you have reduced the risk of repaying your mortgage at the end of the term, and remember the loan is secured against the property.

If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you'll have enough money to pay off the loan. If it doesn't grow as planned, you will have a shortfall and you'll need to think about ways of making this up. You should receive a statement from your savings plan at least once per year and you should review this with your mortgage needs each year, it would be beneficial to discuss this with your mortgage advisor so he knows how much your savings are currently worth and can document this and discuss it with the mortgage provider if required. You should also consider if you have a shortfall with your savings plan if this is the way in which you wish to continue with your mortgage, or would you rather be on a repayment mortgage. Things you may consider at this point are if you en cashed your savings what penalties would you encounter, how much would you be able to reduce the mortgage by and what would be your new mortgage payment on a repayment mortgage if you did this.

The pros: Because you're only paying off the interest, and not the loan itself, your monthly payments will be lower. Because you have selected to have a interest only loan (mortgage) the deals available from the mortgage lenders are generally the same as someone on a repayment mortgage. Fixed interest only mortgage is available and can be a good option if you wish to fix your payments for a specific period, this is generally between 2-5 years. Fixed interest only mortgage has in most cases an application fee payable to the lender which can be added to the loan and also early repayment charges attached in case you change your mortgage before the end of the deal. For more information on both fees ask your mortgage advisor or look on your personal illustration as they will be included in this. These fees are also included if you selected a fixed rate mortgage on a repayment basis and are not just levied at interest only mortgages.

The cons: That debt is not going to go away and your house is secured against it. Throughout the life of the mortgages, you'll need to check your investment or savings plan is on track to repay your loan at the end of the term, if not do not delay act on it and speak with your mortgage advisor. If you can't repay it at the end of the term you may be able to extend the term depending on your circumstances or you could lose your home. So, choosing a repayment or interest-only mortgage is one of the major decisions you will make in life so take time to decide before you make your decision. If you do select interest only you should review both savings and your circumstances at regular intervals.

Combination of Repayment Mortgage and Interest Only Mortgages: As it says this is a combination of both and is fairly common in the mortgage market place. The amount people have split between repayment mortgage and interest only mortgage varies from case to case and is solely based on individual circumstances. You can change your mortgage to a combination if you feel you could benefit from it and is certainly one of the options you should discuss with your mortgage advisor if you are on interest only mortgages with the potential of your savings having a shortfall.

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