Capital Repayment or Interest Only?
On this page of the Signature Mortgages website we will explain the main types of mortgages available and the potential advantages and disadvantages of each.
Also known as capital mortgages, repayment mortgages are the traditional means of paying for a property so that eventually it becomes fully yours as a result of the payments. The term of a repayment mortgage is typically 25 years and at the end of that period you would, if payments have been kept up, owe nothing to the lender. If you have a cautious attitude to repaying your mortgage then it is likely that a repayment mortgage will be more suitable.
Your mortgage payments are divided into capital repayments which are repayments of the money you borrowed and interest payments which are repayments of the interest charged for the loan.
Every month you pay off some of the interest and some of the capital. The monthly repayments on a repayment mortgage will be greater than an equivalent interest only mortgage.
Interest Only Mortgages
As the name suggests with an interest only mortgage you are only paying off the interest on the loan. The capital remains unpaid.
Typically, interest only mortgages run alongside an investment. The idea being that the investment is used to pay off the mortgage at the end of its term. If you have an adventurous attitude to repaying your mortgage than an interest only mortgage may be for you.
PLEASE NOTE THAT WE CANNOT PROVIDE INVESTMENT ADVICE ON INVESTMENT PRODUCTS
There are four main product types on either interest only or repayment mortgages. On this page we will explain the workings of each of these:
Discount Variable Rate
Fixed rate – Fixed rate mortgages have an interest rate that remains the same for a period of time – usually between 1 and 5 years. After this period of time the interest rate reverts to the lenders standard variable rate. The fixed rate is usually at a discount as an incentive to take out the mortgage.
The advantage of fixed rate mortgages is that there are no surprises for the duration of the fixed rate. The downside to this type of mortgage occurs if the Bank of England base rate or libor rate falls, in which case you could end up paying more than you would have with a variable rate mortgage. Also if you want to leave before the agreed term the early repayment charge is usually significant. For example you may be charged six months gross interest if you leave a five-year fixed rate agreement.
Variable & Trackers – A variable rate mortgage is where the interest rate varies according to the Bank of England base rate or the libor rate. A lender’s variable rate is set above the base rate by usually by 1 – 2%. A tracker mortgage is usually set at a certain percentage above the Bank of England base rate.
With these type of mortgages the upside is the same as the downside; the interest rate can go down, saving you money, or up, in which case your interest payments increase.
Capped Rate – With a Capped rate mortgage the amount of interest you pay can go down if the variable rate falls but cannot go above a predefined maximum. The advantage is that the rate can never go too high and if the rate falls then you pay less.
The disadvantage of this type of mortgage is that there are only a limited number of these deals on the market and they can be less competitive than fixed or variable rates. There is also often an administration charge.
Discounted Variable Rates – As the name suggests by tempting new customers, lenders will offer a variable rate at a reduced initial rate or below their standard variable rate. After the agreed period, again one to five years typically, the rate reverts to the lender’s standard variable rate.
The interest rate during the discount period will go up and down in line with the standard variable rate. Disadvantages of this type of mortgage are obviously that the rate can go up and there are usually early repayment charges for repaying the mortgage before an agreed date. It is also possible that early repayment charges may apply for a period longer than the discount period. This is called overhang.
For further information about interest rates on mortgages please contact us today on 0844 561 7250 or email@example.com Alternatively, use the Call Back form to register your enquiry.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE
FOR ESTABLISHING YOUR NEEDS, UNDERTAKING RESEARCH AND MAKING A RECOMMENDATION, WE CHARGE A FEE OF £95 ON APPLICATION UP TO £1,295 ON COMPLETION, HOWEVER OUR TYPICAL FEE WILL BE £95 ON APPLICATION AND £595 ON COMPLETION. OUR FEE BECOMES PAYABLE WHEN WE PROVIDE YOU WITH OUR RECOMMENDATION(S).
IF YOU CHOOSE TO PROCEED WITH OUR RECOMMENDATION AND THE MORTGAGE GOES AHEAD, WE WILL ALSO BE PAID COMMISSION FROM THE LENDER FOR ARRANGING THE MORTGAGE ON YOUR BEHALF.
IF YOU APPLY FOR A MORTGAGE THAT DOES NOT GO AHEAD, YOU WILL RECEIVE NO REFUND