Mortgages Guide | Mortgage Help Product Information

TheMoveChannel.com | Repayment Options

Introduction

Repayment mortgages are the most traditional and widely used way of returning borrowed money to mortgage lenders. Simple and easy to understand, it is generally accepted that they also offer the most risk-free route to clearing your mortgage debt.

Each month you will make a single repayment to the mortgage lender. Part of it will be an interest charge on the outstanding balance of the mortgage and the rest of it will go towards reducing your debt.

Unless interest rates change or your introductory offer period ends, repayments will stay at the same amount each month. If the interest rate payable on your mortgage changes for some reason, then the cost of your repayments is altered so that the loan is still repaid at the end of the specified term.

repayment

In the early years of a repayment mortgage, the bulk of the monthly repayment is taken up with paying interest on your debt to the lender. Only a small portion of the sum you pay out will be used to reduce the amount of capital that you owe. As your debt slowly starts to fall, so too does the amount of interest you will owe the lender each month. Smaller interest charges mean that more of your loan is used to repay the capital, reducing the outstanding balance faster and faster as time goes on.

Term

Although it is the most common term for which a mortgage is taken out, you are not always restricted to having a repayment mortgage that runs for twenty-five years. Depending on your age and circumstances, most lenders will consider letting you pay it back over a longer or shorter period of time.

Paying it back over a longer period means that a smaller amount is needed each month in order to make your repayments. This suits some people, even though it is a relatively inefficient way to approach paying your loan back. Stretching out the term means that you pay interest on the capital for a longer total period of time. Stretching out the repayment curve to a longer term means that you make slower inroads into repaying the capital in the early years. These two factors combine to mean that a longer term results in you paying out a considerably higher amount in interest over the life of the loan, all other things being equal.

The opposite of this also holds true - if you can afford the slightly higher repayments that will result, there is a clear case for arranging for the term of your mortgage to be less than twenty-five years. A shorter term means that you pay interest on your debt for less time, while the shorter repayment curve means that you make faster inroads into repaying the capital - factors that can combine to mean you pay out a considerably lower amount in interest over the life of the loan.

This is one reason that mortgages that allow regular overpayments or single lump sum deposits have become increasingly popular. By overpaying or depositing a lump sum early on in your mortgage term, it is possible to shorten the repayment schedule, often resulting in huge savings in terms of the total amount of interest paid over the life of the mortgage.

Advantages

Repayment mortgages are the lowest risk method of paying back your mortgage, in as much that you can be sure that if you make your repayments for the full duration of the term, then your debt will definitely be cleared on schedule. This is not necessarily the case with an interest-only mortgage, which rely on the sometimes-volatile performance of a separate investment product in order to repay the debt.

Repayment mortgages do not require you to understand any complex financial products. You know that each month you are paying out a set amount and that each month and year you are reducing your debt. It's a simple matter of borrowing money, being charged interest for the privilege and paying it back over a set period of time. This is not the case with an interest-only mortgage, which requires you to understand, pay into and monitor the performance of a separate investment product.

Some interest-only mortgages make use of endowment investment products to repay the loan, which incorporate an investment element and life insurance cover. Though this may appeal to some people, plenty of others prefer the way that a repayment mortgage keeps the mortgage debt separate from investment or protection products. Many observers believe that it is possible to achieve stronger investment performance and more competitive policy premium prices by arranging such products separately.

In terms of the total interest bill, repayment mortgages are far more cost effective than interest-only mortgages. The total interest charges over the life of the loan on a repayment mortgage are much lower than with any other way of paying it back. Since you are only charged interest on the outstanding debt, the constantly reducing balance leads to a significantly lower amount of interest being paid over the term than with an interest-only mortgage, where interest is charged on the full debt for the full term.

Repayment mortgages can be incredibly flexible. As long as the lender will allow you, it is possible to extend or reduce the term when rates change to ensure your monthly outgoings remain the same. You may be able to take payment holidays, add to your borrowing, pay off lump sums, or even switch to other mortgage products. This level of flexibility is not always possible with interest only mortgages, particularly where poor performance of the associated investment product can act as a constraint on your freedom to alter monthly payments.

Disadvantages

Repayment mortgages offer no possibility of having a lump sum to look forward to at the end of the mortgage term.

Although overpayments can lead to an early finish to your mortgage term therefore leaving you with more disposable income, some borrowers like the possibility of a sizeable tax-free cash windfall at the end of your mortgage term. Unlike some investments that are used with interest-only mortgages, there is no built in life assurance cover with a repayment mortgage. Many lenders recommend that you arrange decreasing term assurance to cover the outstanding capital for the life of the loan. This will be a separate expense that you will have to cater for. Arranging this separately means that you have to go through the added hassle of finding a suitable life policy and provider.

If you move house after a few years, you will often have to repay your existing loan and take out a new one. Since most of the repayments in the early years consist of interest on the existing balance, not a huge amount of capital will have been repaid from the original debt. Many people end up taking out another twenty-five year loan, especially if you are trading up to a higher value property. This once again puts you at the start of the repayment schedule, meaning that the bulk of your repayments are once again being taken up with servicing the interest bill on the mortgage debt. If you move house several times, you can start to get the feeling that you are not making any inroads into your debt and will never see the end of your mortgage term.

To get round this problem, some lenders now offer loans that are portable. This means that you do not have to repay the mortgage and take out a new one each time you move house. Provided that you do not need to increase your borrowings when you move, you can take your original loan with you, securing it against the new property. This allows you to maintain your position on the repayment schedule, avoid wasting the inroads that you have made into reducing your debt, thereby making it easier to keep the same date for paying off your mortgage.