What is a Repayment Mortgage?

illustration of What is a Repayment Mortgage?

What is a repayment mortgage?

A repayment mortgage is when your monthly payments go towards paying off the amount you’ve borrowed (the capital) and some of the interest too. As long as you make all your payments, you’ll definitely have paid off everything you owe by the time your mortgage term ends.

Repayment mortgages are the most common type of mortgage. If you’re buying a property to live in (rather than buy-to-let) then you’ll probably always take out a repayment mortgage.

How does a repayment mortgage work?

You might hear the term ‘front-loaded interest’ when you take out a repayment mortgage. This means that you’ll be paying off more interest out the outset as the amount you still owe will be bigger. 

You might be surprised by how much of your payments are going towards just interest. But it’s not a reason to be disheartened. As time goes on, you’ll start chipping away at more of what you owe and bring your balance right down. 

Your monthly payments are higher than they would be with an interest-only mortgage. But the advantage is you’re making a dent in what you’ve borrowed, and won’t be left with a big balance to pay back when your mortgage ends. 

Work out what your repayments might look like with our Mortgage Payment Calculator.

What are the types of repayment mortgage?

Along with choosing how you pay back your mortgage, you’ll also need to consider the interest type on your mortgage. There’s a few different ones, and they can all affect your mortgage differently.

Fixed

Fixed rate mortgages are very popular in the UK. Fixed Rate means the amount of interest you’ll pay won’t change for a fixed amount of time. Typically, this is between two and five years. When your fixed rate deal ends, your interest rate will switch to your mortgage lender’s ‘standard variable rate’ (SVR). 

Standard Variable Rate (SVR)

SVR mortgage rates follow the Bank of England’s base interest rate as it goes up or down. Interest rates are affected by changes to the UK economy. If interest rates go down, you’ll pay less interest on your mortgage. If it goes up, you’ll pay more. 

Tracker

Similar to the SVR, this type of mortgage interest follows trends from the Bank of England. Your interest rate will be set either under or over the base rate. Tracker mortgages follow (track) this external interest rate.

Discount

A type of variable rate, Discount Rate mortgages have a fixed interest rate set lower than your lender’s SRV for a period of time. Essentially a ‘discounted’ rate. 

Capped

Capped rate mortgages are a form of Variable Rate mortgage. However, they have an upper limit - or cap - for how much the interest rate can increase. They’re fairly rare these days.

Offset

Offset mortgages help you to pay off your mortgage faster. This can be through cutting down your monthly payments or shortening your mortgage term. Offset mortgages can be either fixed rate or variable, but the difference is your savings are used to ‘offset’ some of the interest paid on your mortgage.

What’s the difference between repayment and interest-only mortgages?

Interest-only mortgages are just that - you only pay back the interest on your mortgage, and not the actual loan amount. At the end of your mortgage term, you’ll need to pay the whole loan back in one go, usually by selling the property or using investments.

Interest-only mortgages are really popular with buy-to-let investors as the monthly payments are a lot cheaper. They’re also quite risky, as you’re relying on property prices staying high. 

While an interest-only mortgage might seem tempting for the lower monthly payments, unless you’re paying into an investment each month to eventually pay off the loan, you could be stuck with a huge balance that you can’t repay. 

You’ll also pay more in the long run with an interest-only mortgage because you’re paying interest on the entire loan every month. With a repayment mortgage, you’re reducing the size of the loan, so the interest goes down as time goes on.

Interest-only mortgages are fairly hard to come by, though they’ve started to make a comeback since the COVID-19 pandemic. Repayment mortgages are the main way to get a loan on your home, and you’ll have to pass a mortgage lender’s checks to get one. 

The mortgage world can be full of jargon and conflicting information. It’s a good idea to work with a mortgage broker; someone who knows the market and can provide the best advice for you. We can help with that! Make a quick enquiry to get matched to your perfect broker. It only takes two minutes and won’t harm your credit score.

Can I change from repayment to interest-only?

Yes, you can change your mortgage from repayment to interest-only. Depending on your situation at the time, you can apply to remortgage onto an interest-only deal. You’ll need to check when your current deal ends if you’re on a fixed rate, as you could be hit with big fees for changing your mortgage. 

If your financial situation has changed temporarily and you’re struggling to keep up with your mortgage payments, you can ask your lender to switch you to interest-only temporarily. This will bring your payments down for a short time while you find your feet. All lenders are different though, so it’s best to talk to them as soon as possible if you’re considering it.

Switching mortgages can be a tricky business, especially if you have complex circumstances like bad credit or self-employment. We work with specialist advisors who deal only with the tricky stuff. Make an enquiry to find out your options.

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