Mortgage Repayment Options
This document explains your choices and the length of time to repay your mortgage product.
Capital and Interest Mortage – also known as a Repayment Mortgage
This is the most common type of mortgage repayment used in the market today, as it guarantees your mortgage will be repaid over the mortgage term (see below). This is based upon all monthly repayments being made and adjusted, as appropriate, to reflect the prevailing interest rate applicable to your mortgage over the term it was established for.
As the name implies, with this type of mortgage you pay both interest and the capital off your mortgage on a monthly basis for the duration of the mortgage term. When you receive your annual mortgage statement in the early years you will see that more of your monthly repayments go towards the payment of interest rather than paying off the outstanding balance of your mortgage. However, this will change as the years go by so that towards the end of your mortgage term more of the monthly repayments go to reducing the outstanding balance.
Interest Only Mortgage – also known as Endowment or Pension Mortgage
The popularity of this type of mortgage has reduced considerably over the past few years. With this type of mortgage you only pay the interest due each month on the amount borrowed. This means that you will still owe the same amount you borrowed at the end of the mortgage term as you did when the mortgage started. You will therefore need to have made separate arrangements to repay this balance at the end of the term.
Typically this type of mortgage requires you to set up a separate repayment vehicle alongside the monthly mortgage interest payments, such as an endowment or a similar savings/investment based product, or even a pension. However, many consumers have found that their endowment or other repayment vehicle have not performed as they originally believed they would, or they may even have cancelled these arrangements. Therefore they will find themselves short of funds to repay the mortgage balance at the end of the term.
If you are in this position you need to seek advice sooner rather than later. If you do not then the lender can demand repayment of the outstanding mortgage debt at the end of the originally agreed term and start proceedings against you to recover their money.
Mortgage Term
When you take out a mortgage you arrange to repay this over a set term of years. The most common term that people take their borrowing over is 25 years. However, in recent years some Lenders have allowed lending to be taken out over a longer period and this will depend on your age at the time of application. The longer your mortgage term the longer your payments are spread over. This will mean that your repayments will be lower but you will also be paying more interest over the mortgage term. During our discussions we will assess the best term for you to arrange your mortgage over, so that it ties in with your objectives and financial circumstances. This will become apparent during the completion of the thorough fact-finding process we undertake with all our clients before they apply for the mortgage and will be revisited during the on-going reviews that we undertake with all our clients throughout the term of their individual mortgage arrangements.