Demystifying Repayment Mortgages

Are you looking to buy your first home? It is a big step, and now more than ever you need to be prepared!

Before you start viewing properties, deciding on locations, debating on buying a house versus a flat or whether you need that extra room, etc, you will most likely have plenty of questions.

One of the main talking points in our client meetings revolves around how a repayment mortgage works.

Think of a repayment mortgage as a ladder leading you to the rooftop of owning your home. With each monthly payment, you don’t just pay off the accrued interest but also chip away at the actual loan amount you borrowed. It’s like paying rent to your bank but with the sweet reward of gradually owning a bigger and bigger chunk of your home until you finally reach the top and own it all.

Here’s how it works:

• You borrow a lump sum of money from a lender (the loan amount).
• You agree to a specific interest rate on the loan amount for a set period, typically for 2-years, 3-years or 5-years.
• Your monthly payments comprises of two elements:
  • Interest on the outstanding loan amount.
  • A portion of the actual loan amount (capital repayment).
• In the early years of the mortgage, the monthly payments will be predominantly interest and only a small amount of capital repayments, but as the years go by, the interest element becomes smaller and smaller and the capital repayment elements becomes bigger and bigger.
• Over the mortgage term, the capital repayments accumulate, gradually reducing the outstanding loan amount until it reaches zero;
• Once the loan is fully repaid, you own the home outright – congrats, homeowner!

Now, let’s explore some key points to consider:

• Mortgage Term: This is the duration of your mortgage, typically 25 years, but it can be shorter or longer; the maximum term, subject to age and lender criteria, is 40 years.
• Interest rate: This is the cost of borrowing money and can be fixed or variable, depending on your chosen mortgage type.
• Repayment amount: Your monthly payment varies depending on the loan amount, interest rate, and mortgage term.

Benefits of Repayment Mortgages:

• Predictable: Fixed monthly payments make budgeting and long-term planning easier.
• Ownership growth: You gradually build equity in your home with each payment safe in the knowledge that at the end of the mortgage term, you will have paid it off fully.
• Security: Owning your home provides financial stability and a sense of security.

Considerations:

• Higher initial payments: Compared to interest-only mortgages, your initial payments might be higher as they include both interest and capital.
• Less flexibility: Early repayment charges may apply if you want to pay off your mortgage early if you have selected a fixed rate repayment mortgage.

Tips for Navigating Repayment Mortgages:

• Shop around for competitive interest rates and mortgage terms.
• Consider a mortgage protection policy to safeguard your repayments in case of unforeseen circumstances.
• Make additional over payments whenever possible to reduce the loan amount and shorten the term.
• Seek professional advice from a mortgage broker to find the perfect repayment mortgage for your unique needs and financial situation.

Deciding between these rates depends on your unique financial outlook, risk appetite and long-term plans. It’s not just about the cheapest options; choosing the most suitable method to repay the mortgage that works for you with the reward at the end – a home you can truly call your own – is absolutely worth it.

Remember: Our job as a broker is to advise you on which repayment type is available and, more importantly, fits with your risk profile; we will walk you through each aspect before we make a recommendation tailored to you.

Our Stanmore mortgage company is based in England and our team help clients throughout the country. We will help navigate you through the mortgage maze and make owning a home a reality rather than a dream.

Published May 2024.

It is important to take professional advice before making any decision relating to your personal finances. Information within this case study is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for information purposes only.