Mortgages/Finance

Introduction

There are two distinct repayment strategies that may be adopted in the repayment of a mortgage:-

Capital & Interest (Often Known as Repayment)

This structure is very much for the cautious minded individual who wishes to enjoy certainty in their mortgage repayment planning. The lender calculates what monthly installments are required to ensure that by the end of the selected mortgage term, the outstanding balance is guaranteed to reach zero. As any interest rate movements take effect, the lender will automatically recalculate and adjust the monthly installments accordingly to ensure this guarantee remains.

In the early years, each installment will contain a high proportion of interest and a small element of capital. As the years go by and the capital balance reduces so does the interest, thus each installment contains a greater and greater proportion of capital.

We consider this to be the only option should you require no risk to your mortgage’s eventual repayment.

Interest Only

As this suggests, each installment paid represents the calculated interest only. This leaves the initial balance of the mortgage outstanding for the duration.

True interest only mortgages are allowed by lenders in regards to buy to let investments, where the mortgage is expected to be repaid from the proceeds of the property’s eventual sale.

However, in regards to residential mortgages, lenders expect the applicant to simultaneously invest into a regular savings vehicle. This should be targeted to accumulate a sufficient fund at the end of the term to facilitate the redemption of the mortgage. Investments such as Individual Savings Accounts (ISAs), pensions and endowments are regarded as acceptable investment mediums, although some lenders are happy to look at alternative repayment strategies. Most lenders no longer need to see evidence of the investment. However, it is the applicant’s responsibility to ensure that not only is the plan effected but is regularly monitored to measure it’s progress towards the final objective of repaying your mortgage. Should insufficient funds be accumulated, then other investments will need to be realised, another mortgage raised or the property ultimately be sold.

This approach to repaying your mortgage should only be adopted if you believe that other asset classes may outperform the interest rate being charged. You must also be happy with the associated investment risk and the lack of an outright guarantee to the repayment of your mortgage.

Split

It must be said that most lenders are happy to accept a split repayment strategy, allowing a combination of the above two methods in any proportion. This may be particularly suitable for existing mortgagees that have existing mortgage related investments, typically mortgage endowment plans.