Mortgages are one of the largest single transactions in most people’s lives, and buying a property can be a stressful and time-consuming experience. Nowadays, however, you don’t need to simply accept a lender’s offer – banks, building societies and smaller niche lenders compete for your business, all offering a variety of interest rate deals, associated fees and other enhancements to attract borrowers.
There are two main methods of repaying a mortgage – capital and repayment, and interest-only. To suit individual circumstances, a combination of the two is also possible. A description of these methods is provided below.
Repayment Method (capital and interest)
With repayment mortgages, your monthly repayments consist of both interest and capital – over time, the amount outstanding decreases. In the early years, your repayments will be mainly repaying interest and thus the capital outstanding is initially slow to reduce.
The repayment method ensures that the mortgage is entirely repaid by the end of the term, providing all payments are made on time and in full.
As the name suggests, with interest-only mortgages you only repay the interest on the amount borrowed. At the end of the term the capital is still outstanding. Therefore, you will usually need to take out some kind of investment policy to save up enough money to repay the mortgage at the end of the term.
Traditionally, the preferred product for repaying the capital of an interest-only mortgage was a mortgage endowment policy (which included a set amount of life cover) – more recently, however, customers are using Individual Savings Accounts (ISAs) and pensions to build up a sufficient sum, and are taking advantage of the tax breaks offered by these products.