Guide To Mortgage Repayments

What is mortgage repayment?
Mortgage repayment refers to the process of repaying a loan taken out to buy a property. The amount to be repaid is usually measured in tens or hundreds of thousands of pounds.

Who will need to make mortgage repayments?
Mortgage repayments will be necessary for anyone who does not have the cash to buy a property outright, which is the vast majority of people in the UK. However, there are a number of different ways of tackling mortgage repayments. Some may be better for you than others, but this will depend on your circumstances and the risks you wish to take.

What are the different ways to repay a mortgage?
There are two primary ways of repaying a mortgage:

• A standard repayment mortgage: You pay a regular amount which covers both the interest on the mortgage and the repayment of the borrowed capital. Repayment terms are usually between 15-25 years.
• An interest-only mortgage: You only pay the interest on the money you borrow. You invest money separately, with the aim of repaying the borrowed capital in one lump sum at the end of the mortgage term.

Within these two methods, there are a number of different options and products that can be used. We will examine these choices in two sections.

Standard repayment options
There are three main methods of determining interest rates for mortgages:

• Variable rate: The interest rate of the borrowed capital follows the changes in a variable rate set by the lender. This can change at any time. The rate you are charged is set at a level either above or below this Standard Variable Rate (SVR).
• Tracker rate: The interest rate follows an external tracker, such as the Bank of England Base Rate or the London InterBank Offered Rate (LIBOR). Any change made to those rates is applied instantly to your own mortgage rate.
• Fixed rate: Your interest rate remains at a fixed amount, and does not change.

See our Guide To Mortgage Interest Rates for more information on standard mortgage repayment options.
These methods can either be permanent or change after a set period of the mortgage i.e. a mortgage that tracks the Bank of England Base Rate for five years before changing to the SVR of the lender. Additional options and deals can also be applied in conjunction with the above or as entirely separate products, these include:

• Capped rate: The interest rate has a set upper limit, and sometimes a lower limit, beyond which it cannot pass. An upper limit provides security both for the borrower, preventing tracker or variable rate mortgages from moving up to a level they cannot afford. A lower limit provides security for lenders, preventing a mortgage from dropping to a level where they could potentially be losing money.
• Discount rate : A discount rate mortgage offers a lower interest rate for a set period over the start of a mortgage. This period can be anything from six months to ten years long in some cases. After this period, the interest rate reverts to a higher Standard Variable or tracker rate.
• Flexible mortgage : A flexible mortgage is an increasingly popular product that allows more flexibility in mortgage repayments. Overpayments, underpayments and payment holidays are all available subject to conditions. Regular overpayments can significantly shorten the overall length of a mortgage. Underpayments and payment holidays can allow breaks in repayment when needed.
• Offset mortgage : An offset mortgage takes into account your savings when determining the interest on your mortgage. Any savings held are deducted from your mortgage borrowing, leading to lower interest repayments.
• Current Account Mortgage (CAM) : A CAM is similar to an offset mortgage, but in this case your mortgage and current account are merged together. Your income is usually required to be paid into this new account, with the any savings in the account deducted from the total of your mortgage. This can lead to lower interest repayments for disciplined savers, and therefore a mortgage that is paid off earlier.

Interest-only options
For those who plan to invest their money separately and pay off their mortgage in one large lump sum, there are a number of options:

• Endowments : The now largely discredited endowment mortgages are still offered by some providers. Regular payments are made into the endowment over the course of the investment, with any returns reinvested. Money cannot be accessed until maturity, with the time until maturity set to a period over which the money is expected to grow large enough to pay off the borrowed mortgage capital. However, endowment underperformance over the past decade has lead to 80% of endowment mortgages not reaching their targets, according to government figures.
• Individual Savings Accounts (ISAs): Money is paid regularly into mini or maxi ISAs. This money is invested into the stock market, with the usual range of choices that an ISA provides. ISAs are designed to provide tax free saving, which is another advantage. However, investors in the stock market should be aware that the value of their investments can both rise and fall. While an ISA mortgage can offer a faster method of repaying your mortgage, it can also do exactly the opposite.
• Pensions : This option allows you to repay a mortgage through capital raised in a pension scheme. This will only be a viable option for a select group of house buyers, and it is worth consulting with your accountant or independent financial adviser before seriously considering this course of action.

What are the average costs of a mortgage repayment?
Over time, you will have repaid more the amount you have borrowed. This is due to the interest charged on the mortgage, which is used by the lender for a number of reasons, including paying off bad debts from other borrowers. Interest payments on your mortgage will become smaller as you repay more and more of the capital, which for a standard repayment mortgage will mean the borrowed capital will shrink far faster towards the end of the mortgage period. Overcoming early interest payments is the major part of mortgage agreements, which is why early overpayments can make a large difference in later years.

How do you choose between different mortgage products?
Choosing between different mortgage products will largely depend on your personal and financial circumstances. Different factors you should take into account are:

• How much can you repay per month? Bear in mind that should the interest rate of your mortgage go up, you will be required to pay more. For those on tight budgets, a fixed rate mortgage may be better over the long term. It is also possible to remortgage to another product if rates become too high, but that itself comes with its own fees and charges.
• How large can your initial deposit be? Interest rates, length of repayment and repayment amounts all improve depending on how much money is put in. While there are a number of 100% loan-to-value (LTV) mortgages available, it is far more preferable to have some sort of deposit.
• How much do you need to borrow? Mortgage lenders will allow you to borrow up to a certain amount depending on your income. The maximum currently offered by some providers is four to five times your yearly income, but most offer amounts between three to four times your income. Borrowing more increases your monthly repayments and takes longer to pay off.
• How long do you want to repay your mortgage over? A longer period of repayment can offer lower monthly payments but will also mean you pay more in interest over the course of the mortgage. The sooner the mortgage is paid off, the less you pay overall in most cases.
• How stable is your income? If you’re not confident in your job or feel your income might fluctuate for other reasons, then it may be worth either delaying taking out a mortgage or arranging a flexible mortgage that will allow more leeway in both good times and bad. If in doubt, you can always consult external advice such as your accountant or an independent financial adviser.
• What is your credit history like? Those with spotty or impaired credit histories may find it difficult to find an appropriate mortgage. There are a number of options here. One is to repair your credit history before taking on a mortgage agreement, while another is to obtain a credit repair mortgage or similar product.
• What other savings do you have? Those with significant other savings that they do not wish to invest directly in the mortgage may want to consider an offset mortgage or CAM.
• Are you able to change mortgages often? If you are going to have the time to be on the lookout for the best deals, say by taking advantage of discount mortgages and swapping to better deals when their discounted rates expire, be sure to arrange terms and conditions that allow you to do that.
• Where do you live? Some local building societies and specialist mortgage providers offer preferential deals to those who live locally. It may be worth including this in any comparison you make.

Who provides mortgages?
Mortgages are provided through banks, building societies and specialist mortgage companies.
Some mortgage providers also work through third party organisations such as brokers or intermediaries. Unbiased and qualified advice on mortgages can be obtained from Independent Financial Advisers (IFAs) who specialise in this market. They are the only sources who are legally obliged to offer independent advice that is not on a commission basis, and are not affiliated or tied to any company or product.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.