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Repayment mortgage

There are two main types of mortgages available and it’s useful to know which is best for you before you start your mortgage application. If you’re considering taking out a mortgage then you’ll want to be 100% sure you are choosing the right option for you and your needs.

On this page we will review the benefits of a repayment (Capital & Interest) mortgage and give a bit of insight into how this type of mortgage works.

What is a repayment mortgage?

A repayment mortgage is an agreement made with a lender such as a bank or building society, where the lender will agree a loan for a specific amount. This will depend on the amount of deposit or equity provided (usually a minimum of 10% of the loan requested) and the value of the property.

Various other factors will also be part of the lenders consideration, such as the borrowers credit score and annual income.

Every month the repayments will go towards paying off the capital borrowed plus the interest on the loan, with this rate varying depending on the type of mortgage and the interest rates of the individual lender. This is why this type of mortgage is often referred to as a “capital and interest” mortgage.

This is by far the most common type of mortgage available in today’s market. With this type of mortgage, as long as the repayments are paid promptly every month, it is guaranteed that the money owed plus the interest will be fully repaid by the end of the term of the loan.

A standard amount of time for a mortgage term is around 25 years, though this can vary depending on the individual lender and mortgage deal.

Usually to begin with, the majority of the monthly payment amount will go towards paying for interest with a gradual shift toward paying off the capital as the years go on.

There are a lot of benefits to a repayment mortgage. We will outline these below.

Benefits of a repayment mortgage

There are numerous benefits to a repayment mortgage. Below we have a table illustrating the pros and cons of this type of mortgage. This allows for borrowers to make an informed decision as to whether this is the right type of mortgage for their needs.

PROCON
Debt free at the end of the mortgage term: all of the capital plus the interest should be paid back by the end of the term, provided all payments are on timeMonthly repayments will be higher than with an interest only mortgage
Various types of mortgage are on offer with repayment mortgages e.g. fixed rate, standard variable rate etc. giving several options for potential borrowersIt will take a few years of paying before the debt decreases as initial payments will mainly go towards paying the interest on the loan
The equity in the property will increase the further into the mortgage term the borrower is, leading to a more advantageous position with lenders if choosing to switch dealsThe mortgage term is often anywhere up to 25 years, equalling a very long-term commitment
If the mortgage was used to buy a house, depending on the city, rent could cost more per month than the amount paid for a mortgage for a similar property – equalling long-term savings on cost of livingA deposit is required, meaning committing to saving up a significant lump sum. Some lenders may offer deposits as low as 5% so check with individual providers for more details.

Reasons to take out a mortgage or remortgage

the first thought when thinking of mortgages could be funding the purchase of a house. There are actually many reasons someone may take out a mortgage or decide to remortgage from their current mortgage deal. These are:

  • To fund renovations or home improvements
  • Collateral for a personal loan
  • Debt consolidation: borrowing against an existing mortgage to pay off other debts
  • Buying a second property for business premises
  • Buying a second property to rent out (Buy-to-let)
  • Taking out a joint mortgage with another person
  • To help pay for a divorce settlement
  • Other reasons such as purchasing a car/holiday, school fees etc.

All of the above can be funded by a mortgage, if a lender agrees on terms that work for both parties.

Whether a lender will agree to provide funds will depend on various factors such as credit score, annual income and what exactly the money is being used for.

If borrowing against an existing mortgage, the lender may want proof of what you are using the money for before agreeing to a further loan. Reasons such as renovations, which would increase the value of a property, are more likely to be approved than if the loan is requested to fund something like a holiday.

For more information on buying a home with a mortgage CLICK HERE.

For more information on remortgaging a property CLICK HERE.

Can I take out a buy to let repayment mortgage?

YES – it is possible to take out a buy to let mortgage on a capital and repayment basis. However, most landlords looking to buy a new property will take out an interest-only mortgage.

This is so they can decrease their monthly expenses. Monthly repayment rates will be lower due to paying for the interest every month and only having to pay off the loan at the end of the mortgage term.

With rental income from payments received from tenants and a solid savings plan in place, landlords could even stand to make a profit. This would be the desired outcome in this situation. It is vital to have a solid financial plan in place to ensure there is enough money saved to repay the loan at the end of the mortgage term.

There is always the risk though of not having enough saved to repay the capital at the end of the mortgage. This potentially leaves a repayment mortgage looking like an attractive option, despite the monthly costs being slightly more expensive.

Just because interest only is the common practice for a buy to let property, doesn’t mean that a repayment mortgage should be completely discounted without consideration. Repayment mortgages are able to offer benefits that are unavailable with interest only deals. With a repayment mortgage:

  • Pay less interest, and the amount of interest will decrease over time
  • No need to put an exit plan into place for if you ever need to sell the property
  • The property will be owned outright at the end of the mortgage term

As with any mortgage type there are still certain disadvantages. For example, there may be less lenders offering buy to let repayment mortgages. The advantages are still worth considering though before making any decisions.

We would advise looking into both options before making any decisions. Contact a mortgage specialist such as ourselves for further information.

For more information on buy to let mortgages CLICK HERE.

Types of repayment mortgage

There are several different types of repayment mortgage available. These are:

  • Fixed-rate mortgage: the interest rate doesn’t change for a fixed period of time, hence the term ‘fixed-rate’.
  • Tracker mortgages: tracks the Bank of England’s set interest rate and adjusts to that rate when it changes.
  • Discount mortgages: a popular choice – the lender will provide a discount from their standard variable rate of interest for a set amount of time, usually between 2 and 5 years. After this time the monthly repayments will automatically switch to the lender’s standard variable rate.
  • SVR mortgages: SVR stands for standard variable rate. This means the interest paid will be the standard base rate for that particular lender which does not have to be the same as the Bank of England’s rate. Lenders can change the rate at their own discretion.
  • Offset mortgages: can be taken out if the prospective borrower has a savings account with the same lender. The pre-existing savings ‘offsets’ or reduces the amount of interest charged, with discount proportionate to the amount of savings in the account.
  • Guarantor mortgages: the same idea as a guarantor for rental agreements. If the borrower doesn’t have enough income to qualify for a mortgage on their own, a guarantor can be put in place. The guarantor will agree to repay the amount borrowed if the person who took out the mortgage is unable to pay.

All of these mortgage types will have their own advantages and disadvantages, so it is worth further researching each mortgage available before making any decisions. If you’re unsure of the best option, speak to a mortgage specialist for further advice.

How much will my mortgage repayments be?

This will depend on how much capital has been borrowed. Most people will put down a deposit that is around 10% of the price of the loan they are looking to take out. Some lenders may require more than this depending on the circumstance.

Some lenders will allow a deposit to be as little as 5%. There is also the option to put down a larger amount than the minimum needed to decrease the amount needed to pay back overall.

It is also worth considering that the interest rate paid will depend on each individual lender. Every company and every individual mortgage can have different rates. It is best to compare rates across providers to secure the best possible deal.

Below we have an example of how mortgage repayments can vary depending on how much you have borrowed.

Let us imagine a hypothetical situation. A person has taken out a mortgage with a 10% deposit as a down payment and an interest rate of 3.5%, to be repaid over 25 years. This is how much they could expect to pay per month depending on how much they have borrowed:

  • Monthly repayments on 100k mortgage: £501 per month
  • Monthly repayments on 150k mortgage: £751 per month
  • Monthly repayments on 200k mortgage: £1,002 per month
  • Monthly repayments on 300k mortgage: £1,502 per month
  • Monthly repayments on 400k mortgage: £2,003 per month

It is evident to see, the amount borrowed will affect the monthly repayments. This shows an expected result– the larger the amount borrowed, the larger the monthly repayments.

Repayment mortgage with no Early Repayment Charge (EPC)

Occasionally, people will come into extra money unexpectedly. This could be from selling an asset. For example, a share in a business, an insurance payment due to the loss of a loved one – or even something such as a lottery win.

The immediate instinct may be to buy a flashy car or book an expensive holiday. However, thinking logically it may seem a good idea to try and clear any outstanding debts whilst there is the opportunity to do so.

It may be surprising to discover that certain lenders can actually charge you for when you overpay on your mortgage before the end of the mortgage term.

Generally, lenders don’t like when borrowers pay off their mortgage sooner than expected because lenders will expect to earn a certain amount of interest from a mortgage.

As much as they are helping people by loaning out much needed funds, they are also a business. If a mortgage is repaid in full early, the lender loses the money they would have received in interest in the long term.

Early mortgage repayment fees can also be charged in various circumstances:

  • Remortgaging too early into the mortgage term: There are many reasons to remortgage, to pay for renovations to a home or rental property for example. With some lenders, switching to a new mortgage deal before the end of the current one can incur charges. It is best to double check the documents for your mortgage agreement or get in touch with your lender, if you are unsure on their policy on this.
  • Moving to a cheaper property: If the mortgage was used to buy a property and then you decide to downsize, the existing mortgage can usually be transferred to the new property also known as “porting”.

The new property bought could be cheaper than the one currently owned. If this is the case, it is possible to use any extra money from selling that property to pay off some of the mortgage. If tied into a set repayment rate, the borrower can end up paying an early repayment fee for doing this depending on the lender’s specific policies.

  • Selling the property earlier than expected: 25 years is a long time. For whatever reason it could be necessary to sell up and want out of your mortgage many years earlier than expected. The money earned could be used to pay back your loan in full, but most likely this will lead to early repayment charges.

Certain lenders may not have early repayment fee policies in place. Usually standard variable rate (SVR) mortgages will not charge an early repayment fee, though it is possible to still be charged an admin fee if changing lenders.

It is best to speak to individual lenders to check policies for full clarity on this before agreeing to take out a mortgage with them.

Interest only or repayment mortgage

There are two main types of mortgages in the UK, interest only and repayment mortgages. On this page we are focusing on repayment mortgages. Of course though it is also worth finding out what interest only entails, to help determine whether a repayment mortgage is truly the better option.

We have put together a table below highlighting and comparing the features of repayment and interest only mortgages, to allow for a comparison between the two mortgage types.

 Interest onlyRepayment
AdvantagesLower monthly repayments compared to capital and repayment mortgages due to only paying the interest amount.A popular choice for landlords as they can save a portion of the rent money to pay off the rest of the loan at the end of the mortgage term.Paying less interest over time as the amount owed decreases. At the end of the mortgage, all of the capital plus interest should be paid off equalling no outstanding debt.
DisadvantagesAll of the capital will still be owed at the end of the mortgage term as it is only the interest that is paid off with the monthly repayments.Usually, an approved repayment plan will need to be in place, so the lender knows you will be able to repay the capital.Higher monthly repayments than with interest only mortgages.Initially, the payments only go towards interest meaning it can take a few years for the amount of capital owed to start to decrease.

After reading this comparison, it could seem that actually an interest only mortgage may be a more appropriate option. You can have a look at our page detailing interest only mortgages for a more thorough comparison.

For more information on interest only mortgages, click HERE.

Can I get a repayment mortgage with bad credit?

During the pandemic, 3.2 million adults across the UK missed a major payment. This could have been for things such as a credit card or mortgage/rent payment. 4 in every 100 people admitted to having missed multiple payments.*

This could be due to various reasons, such as an unexpected expense or being temporarily unable to work due to illness or injury. In circumstances such as this, people through no fault of their own could have seen a negative impact in their credit scores.

For any of those people affected by this, it understandably will cause concern that this could affect the ability to qualify for a mortgage. Be confident in the knowledge that this isn’t the case. There will be a lender out there able to offer a mortgage in most cases.

With a repayment mortgage, the payment rates available will still vary depending on the individual lender. For any concerns about credit history in relation to qualifying for a mortgage, get in touch with a mortgage specialist like us for more advice.

Some lenders will be better than others when it comes to approving repayment mortgages for those with bad credit. This doesn’t automatically mean that no lenders will offer a mortgage to someone with poor credit. We have put in a great amount of time and research to find the best lenders for people with bad credit who want to take out a repayment mortgage. These include:

  • Accord Mortgages
  • Aldermore
  • Bluestone
  • Kensington
  • Paragon
  • Precise
  • The Mortgage Lender

As evidenced by this list, it is absolutely still possible for someone with bad credit to take out a mortgage. Any of the above providers will be worth looking into and depending on individual cases, it may even be possible to secure a mortgage through a mainstream lender.

Check out our page on mortgage deals for bad credit HERE for further information.  

Calculate mortgage repayments

There are many factors to consider when trying to work out mortgage repayments.

Take into account the amount put down as a deposit as well as the individual interest rates offered by lenders and the term of the mortgage.

All of these factors will affect how much the monthly repayments will be. And of course, the bigger the amount borrowed, the larger the repayments will be in proportion to this.

If you are struggling to calculate your potential repayments, there are dedicated mortgage calculators available online that can do this easily and quickly. This can make the job of working out repayments a lot simpler.

Compare mortgages

A mortgage is a massive commitment in terms of both finances and time. It takes a long time to save a deposit and then agree a suitable mortgage deal with a lender. You are then tied into a deal of repayment with the mortgage lender for an average of 25 years. This term can even be longer in some cases.

With such a big commitment, deciding on which mortgage provider to go with is an important decision and not to be taken lightly. It is best to do some research and consider all available options before making any decisions.

Comparing options across several lenders is the best way to ensure a suitable and cost-effective deal is secured.

We understand this may seem an intimidating process, this is why there are companies like us out there to help simplify this process.

We can streamline the mortgage application process for you and find the information needed from a variety of lenders. We can provide an easy to understand comparison of the possible mortgages available, and can even speak to lenders on your behalf.

We are excited to help match you up with the mortgage deal that is the best fit for you – speak to one of our specialists today for great expert advice.

*according to Financial Reporter UK

Resources

Below we have a list of helpful resources related to repayment mortgages for if you would like further information on this subject:

Citizen’s Advice – Buying a home

Citizen’s Advice – Managing your mortgage

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