Repayment Mortgages

What is a Repayment Mortgage?

Repayment mortgages are the most common type of mortgage for residential property in the UK. With a repayment mortgage, your monthly payments cover both the interest due on the loan and also start to repay the capital or borrowed money.

Over the term of the mortgage, typically 25 years, your debt gradually reduces as you repay the capital. At the end of the term, you should have repaid the full amount borrowed and will own your property outright.

The monthly repayments are made up of two elements:

1. The first part repays the amount you have borrowed (the capital).
2. The second part is the interest charged by the lender.

The big advantage of a repayment mortgage is that you are guaranteed to own your home outright at the end of the term, as long as you keep up the repayments.

The monthly payments on a repayment mortgage are usually higher than those on an interest-only mortgage, as you are repaying both the interest and the capital each month. However, over the long term, a repayment mortgage will usually cost you less overall than an interest-only mortgage.

How does a Repayment Mortgage Work?

With a repayment mortgage, the monthly payments you make go towards repaying both the capital (the amount you have borrowed) as well as the interest accrued on the loan.

As each month goes by, a small part of your payment will go towards repaying the capital, and a larger part will cover the interest.

Towards the end of the mortgage term, more of your monthly payment will go towards repaying the capital, and less towards the interest. This is because the amount of interest you pay is based on the amount of capital outstanding.

As the capital reduces, so does the amount of interest charged. This means that, over time, your monthly payments will reduce.

Types of Repayment Mortgage

There are many different types of repayment mortgages available, so it’s important to compare the deals on offer to find the one that best suits your needs.

The two main types of repayment mortgage are:

Fixed-rate mortgages – With a fixed rate mortgage, the interest rate is set for a specific period, usually between two and five years. This gives you the security of knowing how much your repayments will be during that time. However, if interest rates fall, you will not benefit from the lower rates unless you remortgage to a new deal.

Variable-rate mortgages – With a variable-rate mortgage, the interest rate can go up or down over time. This means that your monthly repayments could also increase or decrease. There are different types of variable rate mortgages, including tracker mortgages and discount rate mortgages.

Tracker mortgages follow the Bank of England base rate, so if it goes up, your mortgage payments will also go up. With a discount rate mortgage, the lender offers a discount off their standard variable rate for a set period. After that, the interest rate will usually revert to the lender’s standard variable rate.

Repayment vs Interest Only Mortgages

The main difference between a repayment mortgage and interest-only mortgage is how you pay back the loan. With a repayment mortgage, you repay both the interest and the capital each month, so you are guaranteed to own your home outright at the end of the mortgage term. With an interest-only mortgage, you only repay the interest each month and will need to find a separate way to repay the capital at the end of the mortgage term.

The monthly mortgage repayments on an interest-only mortgage are usually lower than those on a repayment mortgage, as you are only repaying the interest each month. However, over the long term, an interest-only mortgage will usually cost you more overall than a repayment mortgage.

It’s important to remember that with an interest-only mortgage, you will need to find a way to repay the capital at the end of the term. This could be through investment growth, selling the property or taking out another loan.

If you are unsure which type of mortgage is right for you, it’s a good idea to speak to a mortgage advisor who can help you compare the different deals on offer.

Advantages of a Repayment Mortgage

The main advantage of a repayment mortgage is that you are guaranteed to own your home outright at the end of the mortgage term providing you keep up with the monthly repayments.

1. You will have peace of mind knowing that your home is yours and you don’t have to worry about finding a lump sum of money to repay the capital at the end of the term.
2. Repayment mortgages usually have lower interest payable overall than interest-only mortgages, so you could save money in the long run.
3. Your monthly repayments are usually higher than with an interest-only mortgage, but this does mean that you will pay off your mortgage faster.

If you are looking for a mortgage that will enable you to own your home outright at the end of the term, a repayment mortgage is probably the best option for you.

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Disadvantages of a Repayment Mortgage

The main disadvantage of a repayment mortgage is that your monthly payment is usually higher than with an interest-only mortgage.

When it comes to Buy to Let mortgages, the higher payments on a repayment mortgage mean that you will need to find a property that can provide a high enough rental income to cover the repayments, which may limit your choice of properties. This is one of the reasons that interest-only mortgages are favoured by many buy-to-let investors.

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