OTHER POINTS TO CONSIDER!

REPAYMENT & INTEREST ONLY MORTGAGES

REPAYMENT MORTGAGES

On a repayment mortgage you are paying the lender’s monthly interest

rate on your loan and a little bit of the Capital (the amount that

you borrowed). This means that every month you are slightly reducing

your mortgage balance and therefore reducing the next month’s interest.

This is the only type of mortgage that guarantees that you will repay

your debt over the mortgage term as long as you keep up with the lender’s

mortgage payments and interest rate changes.

INTEREST ONLY MORTGAGES

You are only paying back the interest on the loan and not reducing the

balance of your mortgage. These mortgages should only be considered if

you have some definite plan on how to repay the mortgage back. For

example if you had another property that you intended to sell in the

future and use the money from that property to repay the new mortgage

you are arranging.

We do not advise clients to arrange interest only mortgages unless there

is a very clear strategy for repaying the loan in the future. They should

not be used simply to reduce your repayments in the early years as there

is no guarantee that you would be able to afford to change to a

repayment mortgage in the future.

Since 2009 most lenders will not allow true interest only mortgages,

unless you are buying a buy to let property.

If you arranged an interest only mortgage and made your payments each

month until the end of the mortgage term, you would owe exactly the

same amount as you had borrowed initially.

TIE IN PERIODS/ EARLY REPAYMENT CHARGES

Most mortgage products will have an initial tie in period which often

mirrors the product’s benefit period ie a 3 year fixed rate mortgage may

have a 3 year tie in period. During this tie in period the Lender will

charge an “early pepaymeny charge” for repaying all or part of the loan.

The rate of this penalty will vary from lender to lender but for example

they may charge 3% of the amount repaid so if you repaid a £100,000

mortgage when a property was sold during the tie in period the penalty

would be £3000.

Usually the mortgage can be “ported” to your next property to avoid this

penalty, but this needs to be arranged to coincide with your house sale.

Some tie in periods can run even longer than the product you have chosen

and this means you can be tied to an unattractive lenders SVR rate for

an extended time until the penalty runs out.