When you get a mortgage there are 3 main ways you can pay. In this brief guide we will explore those options, their benefits and what you should watch out about them.
Mortgages help those who can't afford to pay the full asking price of a house in one lump sum by giving you a long term loan which you repay usually over 30 years. There are various ways to repay this mortgage including:
- Capital mortgage repayment
- Interest only mortgage repayment
- Interest + capital mortgage repayment(also known as repayment mortgage)
Before going any further it is important to understand the two key ingredients in any mortgage repayment option. In some cases both might exist but in all cases one will always exist.
The two key ingredients in mortgage repayments are:
Interest: the APR charge a lender will place on the capital owed. As the capital owed decreases over time the interest payable will decrease.Over the first few months or years of a mortgage you will usually pay the most interest as at that point the capital owed is at its largest and you are being charged interest on the total capital owed.
Capital: This is the amount borrowed. A proportional amount of capital owed is paid off each month in your monthly payments. If you have a repayment mortgage you will pay off the capital plus interest while an interest only mortgage does not contain any capital repayment per month as the total capital borrowed is paid off at the end of the month.
You can use our mortgage affordability calculator to see how much you can afford to borrow for your mortgage.
Capital repayment mortgage:
There is no such thing as a capital repayment mortgage as all mortgages charge interest there will always be an interest element with mortgages. Capital repayment usually refers to the capital repayment plan put in place to repay the capital borrowed when a borrower takes out an interest only mortgage where the capital is repaid at the end of the term.
The mortgage lender will need to be satisfied that the capital repayment plan put forward by the borrower will be adequate to cover the capital borrowed at the start of the mortgage. If it isn't, then the mortgage lender will refuse the borrower. Mortgage lenders will also periodically check that this capital repayment plan is still in place and no significant changes have occured which will affect its viability.
If you are using investments as your capital repayment method then you should periodically check that your investments are still performing at an acceptable level in which you will be able t pay off your mortgage. If your capital repayment plan starts to falter you should get in touch with your mortgage lender immediately in order to ensure they are aware and can help you plan ahead. You will find it very hard for any other mortgage lenders to accept you for a remortgage with your capital repayment plan faltering.
Interest only mortgages are very risky and proper advice from a digital mortgage broker should be sought before you decide to take on one.
Interest-only mortgage repayment
With interest only mortgages you pay only the interest on the total capital yo borrowed each month. Your monthly payments remain fixed because the total capital borrowed does not go down. This is because your monthly payments do not go towards your capital repayment and your capital has to be repaid at the end of the mortgage term. The mortgage lender will require you have a capital repayment strategy for this and will only approve you for an interest- only mortgage if they feel your capital repayment strategy is sufficient.
People always see interest-only mortgages as a cheaper option to get on the property ladder but adequate advice should be sought from an independent financial advisor to ensure interest-only mortgages are the best fit for you if not you could find yourself in a very bad position down the road.
Interest-only mortgages are commonly used by buy-to-let investors who bet on a quick appreciation in property prices so they can make some profit while paying minimum cost for their mortgage.
In this guide we go into repayment options for interest-only mortgages.
Interest +capital mortgage repayment
Interest plus capital mortgage repayment more commonly known as a repayment mortgage is one where you actually repay both the capital and interest in the mortgage every month. As you continuously make your mortgage repayments you reduce the capital owed and are subsequently charged smaller interest repayments.
At the end of the mortgage term you will have paid back both the capital and interest and you will now fully own the home. If you don't keep up your monthly mortgage payments your home could be repossessed and it will take you longer to own your home.
There are different types of mortgages available and you should always manage your mortgage to ensure you are always on the best deal possible.
You might be able to get some mortgages where it is part repayment and part interest-only.This means for some of the mortgage term you can have an interest only mortgage and for the rest of the term a repayment mortgage(capital plus interest). This means you will likely have some capital to be paid at the end of your mortgage term and you should take this into account to ensure you have a sufficient repayment plan.