Repaying the Loan

Repaying your Mortgage

How you repay your mortgage depends on your individual circumstances, and also how long you will own the property that you are buying. Essentially, there are two ways to repay the money that you have borrowed: Repayment and Interest Only (taken with a repayment vehicle) – this is how they work:

Repayment Mortgage

With this method, you make monthly payments to the lender over an agreed number of years, called “the mortgage term”. Most people choose a term of around 20 to 25 years for their first mortgage, but you can have a longer or shorter term. Your payments cover the interest on the loan and gradually pay off the amount you borrowed, sometimes called the “capital” or “principle”.

Will a Repayment Mortgage pay off my Mortgage?

As long as you make all the payments agreed with the lender and there are no arrears, your mortgage will be paid in full by the end of the term.

Interest Only Mortgage

With this method, your monthly payments to the lender only cover the interest on the loan - the original loan remains outstanding. This is why you usually pay separately into a savings scheme each month to build up a lump sum to pay off the loan at the end of the mortgage term, or sooner, if you can afford to do so. Your monthly savings scheme payment is set at a level that assumes your investment will grow at a certain rate each year. You should not consider this type of repayment method if you want to guarantee that your mortgage will be repaid after the term. Please also remember that your monthly payments could increase if interest rates rise.

Combination Mortgage

You can “mix and match” by using a combination of Repayment and Interest Only methods to repay a mortgage loan, i.e. £100,000 on Repayment and £50,000 on Interest Only.

Savings Vehicles typically used with an Interest Only Mortgage: ISAs

An ISA (Independent Savings Account) is a more tax-efficient savings plan with a wider range of investment choices, including stocks and shares and cash. There is no built-in life cover so you will need to arrange this separately (at extra cost). The government limits how much you can invest each year, which could mean your savings might not be enough to pay off your mortgage at the end of the term. Also, like an Endowment, there is no guarantee that the lump sum at the end will be enough to pay off the mortgage in full.

Savings

You can use various types of savings schemes to build up the money you need to repay your mortgage.

Personal and Stakeholder Pensions

You could use the tax free lump sum part of your pension to repay your mortgage at the end of the term. This is a very tax-efficient mortgage repayment method but is restrictive as the lump sum is only available between the ages of 50 – 75 (55 for those born on or after 6 April 1960) when you are able to retire. By using part of your pension fund to repay your mortgage, you will have less to live on in retirement. Again, the government limits your annual investment, which could mean that your savings might not be enough to pay off your mortgage at the end of the term. As with most types of investments there is no guarantee of the lump sum available and therefore no guarantee you can repay your mortgage in full.

Endowment

This used to be used as a regular savings plan. There is no guarantee that the maturity lump sum will be enough to pay off the mortgage in full.

For a free Mortgage Quote and Advice please click here