There are two basic styles of mortgage – ‘Repayment’ and ‘Interest Only’.
With a repayment mortgage, your monthly payments to the lender go towards reducing the amount you owe as well as repaying the interest they charge. This means that each month you’re paying off a small part of your mortgage loan, especially in the early years.
The advantages: It’s a clear approach – you can see your mortgage getting smaller and, provided you maintain the required payments, you also have the certainty that your mortgage will be repaid at the end of the term.
The disadvantages: Initially, the majority of your payments go towards interest on your mortgage, which means that, in the early years, the amount you owe won’t reduce by very much.
Interest Only Mortgages
With an interest only mortgage your monthly payments pay only the interest charged on your loan, so you’re not actually reducing the loan itself. You’ll need to have a plan agreed with your lender in place to repay your loan at the end of the term. For example - investments, savings plan, downsizing (where you sell your property and buy a cheaper one using the equity to repay your loan), making lump sum payments or changing to a repayment mortgage.
The advantages: If the savings or investment plan you choose performs well, then you could pay off your mortgage earlier compared to a repayment mortgage. At the end of your mortgage term there may be a lump sum available after the mortgage has been repaid.
The disadvantages: Very few investments or savings plans are guaranteed to repay your mortgage in full. At the end of the mortgage term, you are responsible for repaying the mortgage in full. If your savings or investment plan doesn’t cover the full amount, you’ll be responsible for paying the difference. Your mortgage lender can demand repayment, and they’ll charge you interest on any outstanding balance until it’s repaid. The Telegraph reported around 130,00 interest-only mortgages are due to expire every year until 2020, with half facing a shortfall of £71,000 on average. One in 10 borrowers have no repayment plan in place at all. We can review your plans or help you put one in place. Call us today.
Lump sum payments or changing to a repayment mortgage may not be possible if your circumstances change and you can no longer afford the increased amounts. Downsizing is not a guaranteed method of repaying your loan as, even if you have enough equity now, house prices could fall and may leave insufficient equity to repay the loan. It is not advisable to rely on house prices increasing as this might not happen.
We do not charge for our advice. Instead, we simply charge a fee for processing your mortgage application. Our typical fee is £450, however the actual fee will depend on your circumstances.
Your home may be repossessed if you do not keep up repayments on your mortgage.
We source from the whole of the market, with the exception of bridging loans.