repayment mortgage – pros and cons of these

Today I want to talk about the most popular type of mortgage for people who buy their homes. Some of you might know – this is called a repayment mortgage.

I have recently written an article about what are interest only mortgages. Those products are mainly offered to people looking to buy an investment property. Most frequently a buy-to-let. During the period of the product you would mainly only pay the interest on the capital that you borrowed.

With repayment mortgage – you will be making higher monthly payments however will own the property at the end of the term.

what is a repayment mortgage

Repayment mortgage is a type of loan that is mainly used by people looking to buy a home. If you manage to stick to all the monthly payments during the life of the loan – your will own the home you live in outright.

The biggest issue and a fear for many – if you do not stick with the monthly repayments, your home might get repossessed. 

If you actually find yourself in a situation where you might struggle with your mortgage payments – speak with your lender. More often than not – they would like to find a solution to the issue where they wouldn’t have to reposes the property. This would be an additional hassle for them to deal with.

The key feature of repayment mortgage – your monthly payments stay the same. They will only change if the interest rate or the repayment term changes.

One thing that does change – how much of the capital you borrowed you actually repay each month. First couple of years – the picture doesn’t look pretty at all. When you receive your annual mortgage statement – you start questioning if the mortgage is actually going to ever be paid back.

As the years go by and the capital you own within the property increases – the same monthly payments will result in a larger proportion of cash going towards capital repayment and only a small fraction going towards the interest that you accrue.

You can normally get a repayment mortgage with a deposit between 5% and 20%. This will depend on the property, your credit history and how much you can actually afford to pay back monthly.

key benefits vs interest only mortgage

There are a number of benefits that repayment mortgages have vs interest only mortgages. The biggest one of them all – you will own the property at the end of the term. And there is no catch to this.

Interest only mortgages on the other side will charge you less monthly however the capital you borrow in the beginning will have to be paid back as a lump sum. 

An additional benefit you will find with repayment mortgage – your Loan-to-Value will be working in your favour. LTV is as simple measure which compares the size of your loan to the value of the asset that it is secured with.

As your LTV decreases – you will be getting better mortgage rates offered as you will be seen as a less risky borrower. This can make a significant difference to how much interest you actually pay over time.

A further thing you can do with your repayment mortgage – pay a lump to reduce your outstanding mortgage balance. Double check if your contract allows to do so without paying a penalty.

By putting a lump sum towards your mortgage balance – you can either reduce your monthly payments or cut down the term of the mortgage.

Either of the above options will ultimately make you pay less interest over the remaining contract term.

types of repayment mortgage available

When it comes to a repayment mortgage there are several options available for you to pick from:

• Fixed interest rate – this is probably the most frequent repayment mortgage option. This is where you fix your interest rate for a set period of time. After the initial period expires – you can apply for a new fixed term deal.
• Tracker mortgage – this is where your mortgage interest rate can vary. This is normally linked to the Bank of England base rate. Your lender will charge a premium on top of the BoE base rate.
• Standard Variable Rate – this is the rate most people end up paying after their initial mortgage deal comes to an end. This will most frequently be significantly more expensive then getting one of the above 2 types of mortgages.
• Guarantor mortgage – this will often be fixed at a certain level. This type of repayment mortgage can reduce the interest you would otherwise pay through your family guarantying the loan.
• Offset Mortgage – this type of mortgage allows you to use some of your savings to offset part of the borrowed capital. You still have access to your savings while also reduce the amount of interest you would accumulate otherwise. You can learn more about the specifics of this here.

As you can see – the list of options is long. There should be a type of mortgage that will work for everyone. It is also worth considering what type of mortgage might work the best for the economic situation we are going through at the time of picking your product.

When interest rates are rising – you would rather have a safety of fixed product. When we have passed the peak of the interest rate – tracker mortgage might be the best.

summary

Repayment mortgages are the type of product that we use the most when it comes to buying a home.

These give you a peace of mind that your property will be fully paid out once the full mortgage term comes to an end. 

There are few things I would personally do to find the right type of mortgage. Firstly, find yourself a mortgage advisor who can help understand all the complexities of mortgages. Discuss what type of product might be best suited for you. I personally used these guys and was satisfied with the outcome.

Secondly, find an online mortgage calculator and have a go at the numbers. Try to understand what is affordable for you personally. Try to increase the interest rates significantly above where they currently are. This will let you calculate if you will be able to afford the repayments in case the interest rates increase unexpectedly.