A noob’s guide to mortgage repayment methods

Recent statistics show that the average UK property now costs upwards of a quarter-of-a-million pounds. This means unless you have tons of cash lying around, chances are you’ll need to take out a mortgage to finance your home.

But now with thousands of mortgage deals to choose from, coupled with several mortgage repayment methods, deciding which is right for you can be confusing.

Here’s a quick guide to help you structure the mortgage repayment of the capital debt.

Mortgage Repayment Methods

There are four different repayment methods available when you take out a mortgage: repayment, interest-only, accelerated or part and part mortgage repayments.

Repayment mortgage

A repayment mortgage is the most common type of mortgage. With this type, you make monthly payments that go towards both the principal loan amount and the interest.

The advantage of a repayment mortgage is that your loan will be paid off in full at the end of the term. The disadvantage is that your monthly payments will be higher than with an interest-only mortgage.

Interest-only mortgage

Interest-only mortgages are exactly what they sound – you only pay the interest on the loan each month. The principal balance of the loan is not reduced. At the end of the term, you will still owe the original amount borrowed.

This type of mortgage is best suited for those who expect their incomes to increase over time or for those who plan to sell the property before the end of the term.

Accelerated mortgage

When it comes to accelerated mortgage, the borrower pays off the loan at a faster pace than the agreed-upon repayment schedule. They typically do this by making larger monthly payments than what is required under the original repayment schedule.

Accelerated mortgages are often used by borrowers who have the financial means to make larger monthly payments. For example, a borrower who has recently received a raise or bonus at work may choose to put that extra money towards their monthly mortgage payment in order to pay off the loan more quickly.

While accelerated mortgages can be a great way to save money on interest and pay off your loan more quickly, it’s important to make sure that you can afford the larger monthly payments before you commit to this type of repayment plan.

Otherwise, you may find yourself struggling to make ends meet each month, which could lead to missed mortgage payments and damage your credit score.

Part and part mortgages

If you’re on a tight budget, a part and part mortgage could be the right repayment method for you. With this type of mortgage, you make interest-only payments for a set period of time – usually five to 10 years – and then switch to making repayments that cover both the interest and the principal.

Because you’re only paying the interest at first, your monthly payments will be lower, which can give you some breathing room in your budget.

Just be aware that when you switch to making repayments that cover both the interest and principle, your monthly payments will go up.

What’s Included in a Mortgage Payment?

A mortgage payment typically consists of three main parts: principal, interest, and insurance. We take a look at each of them below:

Principal

The principal is the amount of money you borrowed from your lender to purchase your home. Each mortgage payment you make goes toward paying it off.

Interest

This is the fee charged by your lender for borrowing the money to finance your home. In most cases, a portion of each payment goes toward paying the interest, with the remainder going toward reducing the principal balance.

Insurance

As with property taxes, each mortgage payment includes insurance payments. There are two common types of mortgage insurance:

Mortgage protection insurance

Mortgage protection insurance, or MPI in short, is a type of life insurance that pays off your remaining mortgage if you, the policyholder and mortgage borrower, pass away or become incapacitated before you repay your mortgage in full. MPI is a flexible, low-cost way to ensure you don’t lose your home in the event of your untimely disability or death.

Homeowners insurance

Homeowners insurance is a type of policy designed to protect you and your home against any circumstance beyond your control, called perils. This coverage offers protection from things like a fire or theft, ensuring your home’s value remains intact until you get back on your feet.

Conclusion

There are many different ways to repay a mortgage, and the method you choose will depend on your individual circumstances. You should speak to a financial advisor to find out which method is best for you.

In general though, making smaller, more frequent payments is the surest way to reduce your interest payments and ensure you pay off your mortgage without problems. Good luck!