The mortgage term
You can repay your mortgage over a term that suits you - from 1 to 35 years. When considering how long you want your mortgage to run, as well as thinking about how you are planning to repay your mortgage, you should bear in mind how your income may change in the future too. We will only consider lending to customers with a mortgage term that will end before they reach 75. If your loan carries an Early Repayment Charge, you will be unable to choose a term that finishes before the Early Repayment Charge period.
How interest is calculated
Interest is either calculated on daily or annual interest. Daily interest is calculated using the outstanding balance each day, adding it to the mortgage at the end of each month. This means that whenever your balance changes, for example when you make a payment, insterest starts to be charged on the new balance straightaway. With annual interest, the interest is adjusted just once each year rather than immediately following every payment.
Repaying the capital
As well as paying the interest due on your mortgage each month, you will have to repay the capital (the amount you have borrowed). It is up to you how and when you repay it to suit your circumstances, taking into account things like your age, marital status, dependants, the nature of your income and so on. Your options are:
- Repay your mortgage as you go, so it’s completely cleared by the end of the term. This is known as a repayment mortgage.
- Pay only the interest that’s due each month and repay the loan itself at the end of the term, usually from an investment plan - this is called an interest-only mortgage.
- Or do part and part - pay the interest and repay just part of the loan as you go, and repay the remainder at the end of the term as a lump sum.
Since your circumstances can change as time goes by, you could ask to change the way you’re repaying your mortgage in the future if another way suited you better although there may be a fee for making the change.
It is also a very good idea that when arranging your mortgage you review your life assurance and investment arrangements with a financial adviser to ensure that your family are protected and also, if you choose an interest-only mortgage, to make sure that you have the money available to repay it at the end of the term. The rest of this section explains more about your options.
The repayment option
With a repayment mortgage, part of the monthly payment covers the interest due each month and part goes towards repaying the capital - so by the end of the agreed term the loan has normally been paid off completely.
The longer the mortgage term, the lower your monthly payments will be, but overall, because you’re paying the loan back over a longer period, you will pay more interest in total. It works the other way around too - with a shorter mortgage term, to pay the loan off more quickly, your monthly payments are higher, but you’ll pay less interest overall.
The interest-only option
With an interest-only mortgage, as the name suggests, you pay only the interest each month - you don’t pay back any of the capital. This means that the actual amount borrowed doesn’t reduce during the life of the mortgage and the full amount of the loan remains outstanding to be repaid at the end of the mortgage term.
Your monthly payments are therefore less than with a reapyment mortgage, but you will need to ensure that you have the money available at the end of the term to repay the loan. If you are relying on the returns of an investments plant to repay the loanm you should ensure that the terms of both the mortgage and the investment loan are sufficient to allow the investment to build up adequate funds to repay the loan at the end of its term.
The shorter the term of the mortgage, the less interest you will pa overall, although you will have to pay more into any investment you arrange so it grows sufficiently to provide enough money to pay off the loan in full when the mortgage term ends.
Combine the two options
To ensure that you can put together the mortgage that’s right for your circumstances, you can arrange it as interest-only or repayment, or as a combination of the two - so you pay off some of the capital as you go, but there’s also an amount outstanding to repay at the end of the mortgage term.
Investment plans
As mentioned, if you choose to arrange your mortgage as an interest-only loan, you will need to ensure that you have enough money available to repay the capital at the end of the term. To do this, most people take out some form of investment plan - but you should talk to a financial adviser about what is the most appropriate for you. The most common types of investment used for paying off mortgages are:
- endowments
- personal pension plans
- individual savings accounts (ISAs)
If you alreay have investment plans running when you take out your mortgage, your financial adviser may say that the existing plans provide at least part of the cover you need and it won’t be necessary to start a new plan for the full amount of your mortgage.
If you do take out a new investment plan, the regular payments to the investment company will be separate from and in addition to your regular mortgage repayments.
Please remember that the payments into any investment plan are your responsibility and are just as important as your mortgage repayments. You should make sure that they are kept up to date and that the plan remains adequate. Also, if the investment plan is due to continue beyond your retirement date, it’s important that you ensure you will be able to meet your regular payments into it after that date.
The monthly mortgage payments
The most hassle-free way to pay your mortgage is by Direct Debit.
Final repayment
Even though you initially arrange your mortgage over a particular period, you may find in the future that you are in a position to pay it off sooner than originally planned. Check whether an Early Repayment Charge applies to your mortgage.