Mortgage Guides

Repayment mortgages

By Becca Talbot becca@consumerchoices.co.uk

What are the advantages and disadvantages of repayment mortgages and who might they suit? (Updated 4/10/11).

Repayment mortgages are far and away the most popular way to pay back your mortgage borrowings. In 2010, 90% of first-time buyers took out a repayment mortgage, as did 72% of home movers and 70% of those remortgaging , according to the Council of Mortgage Lenders (www.cml.org.uk). But if you’re looking to buy a property now, should you choose a repayment or interest-only mortgage?

In this guide we explain the difference between repayment and interest-only mortgages, look at the advantages and disadvantages of repayment mortgages, and suggest which type of mortgage might suit different circumstances.

• What is a repayment mortgage?
• The difference between a repayment mortgage and an interest-only mortgage
• Who would a repayment mortgage suit?
• Which lenders offer repayment mortgages?
• Advantages and disadvantages of a repayment mortgage
• Recommendations

What is a repayment mortgage?

A repayment mortgage is the simplest type of mortgage. It is also the option that carries the least risk.

The payments you’ll make to your mortgage provider each month will be combined of two parts:

1. Capital
2. Interest

The capital is the money you originally borrowed and the interest is the money you pay for being able to borrow that capital. The interest payments can vary over time, depending on how much you owe and changes in interest rates.

If you are on a fixed rate mortgage your total monthly repayment will be the same amount for the duration of the fixed rate period (normally 2, 3 or 5 years).

If you are on a repayment mortgage with a variable rate, such as a tracker mortgage, a discount mortgage, or if you’re on your provider’s standard variable rate (SVR), your monthly repayments may fluctuate (up and down) depending on various factors, including changes to the Bank of England base rate. Your mortgage lender will notify you of any changes in your monthly payment.

At the start of a repayment mortgage you will be paying off more interest than capital, but eventually you’ll begin to pay off more of the capital.

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The difference between a repayment mortgage and an interest-only mortgage

Repayment mortgages	Interest-only mortgages
You make monthly repayments for an agreed period of time (the term) until you’ve paid back the loan and interest. This is considered the least risky mortgage type, as well as the easiest to understand.	You make monthly repayments for an agreed period, but this will only cover the interest on your loan. You’ll have to pay into another savings or investment plan each month as well, to pay off the capital by the end of the term.

Remember that with an interest-only mortgage, at the end of your mortgage term (typically 25 years, however this could be longer or shorter) you will need to have a way to pay off the original amount or capital that you borrowed to buy the property.

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Who would a repayment mortgage suit?

Repayment mortgages are so simple, they would suit almost anybody. If you want the reassurance of gradually clearing your loan each month, then a repayment mortgage is the best option. With minimal risk, this type of mortgage is ideal for first time buyers, who can use the straightforward repayment system to help them budget carefully.

However, buy-to-let investors often prefer to take out interest-only mortgages. Although as landlords they will pay tax on the rental income (at their normal rate) they can claim back tax on items including mortgage interest, property management fees and maintenance costs. Many also rely on the property market to rise as a means of paying off the capital in the future.

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Which lenders offer repayment mortgages?

Repayment mortgages are the most commonly-offered type of mortgage, and almost all lenders, other than some specialist lenders, offer a range of repayment options.

The best way to find a suitable lender is through an independent mortgage adviser – this will save time and let you access information on a range of products. A good independent mortgage adviser will also be able to offer advice on the pros and cons of different mortgages, helping you compare several mortgages to see which offers the best value.

It’s important to remember that while most lenders offer repayment mortgages, the criteria to get approval for any type of mortgage varies from lender to lender, and in the current financial climate you’ll need a larger deposit than you might have previously.

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Advantages and disadvantages of a repayment mortgage

Before choosing a repayment mortgage you should consider both the advantages and disadvantages:

Advantages of a repayment mortgage

• At the end of the term your debt will have been repaid (providing you have kept up with repayments), and you will own your property outright
• Unlike interest-only mortgages, you don’t have to worry about whether the repayment vehicle you’ve invested in will be successful, ie whether it will provide enough cash to cover the capital sum at the end of the term
• You may be able to vary the term of your repayment mortgage. While the standard repayment mortgage term is 25 years you can ask your lender to set yours up to last a longer or a shorter period if you want
• Many mortgage providers allow you to make overpayments and lump sum payments, reducing both the interest and capital amounts repayable. This is known as having a flexible mortgage or flexible elements in the mortgage
• Most providers offer the option to switch to an interest-only mortgage if you’re faced with financial difficulty, such as a loss of income through redundancy or illness

Disadvantages of a repayment mortgage

• Your monthly repayments will be higher than with an interest-only mortgage.
• There may be redemption penalties for making lump sum/overpayments
• For the first few years of a repayment mortgage the majority of the monthly repayment is interest rather than capital. For borrowers moving house regularly, this can result in little of the capital being paid off

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Things to bear in mind

When choosing between mortgage deals, you’ll need to think about the repayment method, interest rate and special features. The right mortgage for you will depend on your needs and circumstances, so it’s important to understand the options available to you. An independent mortgage adviser will be able to help you make the right choice by evaluating your situation.

Repayment mortgages are the easiest and simplest mortgage product available. They are often flexible too, with the majority of lenders allowing you to alter your repayment structure without accruing any penalties.

If you’re remortgaging your property you should avoid the temptation of keeping the term at 25 years to shrink your repayments, and instead consider reducing the term to get rid of your loan more quickly. When the repayment mortgage has run its term, it’s over. And for most people, that’s highly satisfying.

THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.