Repayment Methods
Capital and Interest Method
A cautious attitude to risk
The Repayment mortgage or Capital and Interest Mortgage is a mortgage where you make monthly payments which contribute towards the total amount borrowed and the interest payable. Repayment mortgages are repaid over a specified period. Assuming you continue to make all your monthly contributions in full, the mortgage is guaranteed to be paid off in full at the end of the arranged mortgage term. During the early years of a repayment mortgage, the majority of each monthly payment is paying the interest owed. The amount paid off each year increases as the mortgage term progresses. The advantages of a Repayment mortgage are: You are guaranteed to pay off your mortgage in full by the end of the repayment term, provided that you make all the required monthly mortgage repayments. You are less likely to suffer from negative equity because your mortgage balance will be reducing month on month. Assuming your property has not dropped in value, as the capital repaid increases you will see an increase in the level of equity in your property. Consequently, when you remortgage or move home you may find it easier to obtain a mortgage. The disadvantages are: Because very little of the amount borrowed is paid off in the early years of the mortgage, if you were to move again in those early years it is likely that you would need to take out a similar new term on your new repayment mortgage in order to keep the monthly repayment amounts manageable and this could mean that the period of paying off your debt could be extended.
Interest Only Method
Adventurous Attitude to Risk
The interest only mortgage requires you to make monthly payments to the mortgage lender in order to pay just the interest on the amount you have borrowed. In addition to the interest only mortgage you need to establish a separate long term repayment strategy. This could include an investment plan, an expected inheritance or disposing of the property in the future. The investment plan required to pay off the mortgage usually comes in one of three forms; an ISA (individual savings plan), a pension or an endowment savings policy. This investment does not have to be provided by the mortgage lender and you could have an open market option of which provider and product you choose. Interest only mortgages can also be changed to a repayment mortgage in the future. This is becoming increasingly popular with first time buyers who find it hard initially to afford the mortgage payments due to wanting to re-furbish or furnish their new property. Several lenders are now actively offering interest only mortgages to first time buyers as a specially designed product whereby it reverts to a Repayment mortgage after a period of time. It is important to remember that taking an interest only mortgage with a view to changing to a repayment mortgage in the future may incur a small fee from you lender. Advantages of an Interest only mortgage: You can choose an 'investment vehicle' that is tax efficient. If the investment growth rate exceeds those estimated at outset you may be able to pay off your mortgage early or receive a lump sum at the end of the repayment period, in addition to paying off your mortgage. Disadvantages of this type of mortgage: No guarantee that you will have sufficient funds to pay off the mortgage at the end of the repayment period, as the investment could perform below that assumed at the start. Your debt remains constant throughout the mortgage period. Some forms of investment may incur a penalty fee if you stop paying premiums. You may be forced to sell your home if you do not have the means to repay the intial mortgage debt at the end of the term.
Can I change the repayment method?
It very much depends on the Lender and your reasons for wishing to change. If you had chosen the Interest only method and now wish to change to a Capital and Interest Mortgage, then we doubt most Lenders would have any objection to this. however, it may not be so easy the other way around! A Lender is likely to want to see some evidence as to how you intend to repay your Mortgage and what vehicle you intend to use to save the required amount needed to repay your Mortgage balance. Unless very good reasons for requiring the change to Interest only from Capital and Interest, it's unlikely that your Lender would agree to the request.
Disclaimer
James Raynor is Authorised and Reulated by the FSA (463141). You may be charged a fee for the processing of your application and this fee and we estimate that this fee will be £195. Your Home is at risk if you do not keep up the repayments of a Mortgage or any other loan secured against it.
