Mortgages

Capital and Interest Mortgages

An arrangement where part of the monthly repayment is used to pay the interest and the remainder is used to reduce the original amount of the loan. In the early years of the mortgage, most of the monthly repayment goes towards paying the interest; in later years, the proportion of the payment that is interest reduces (as more of the capital is repaid) and more of the repayment is available to reduce the loan amount.

Interest-only Mortgages

Interest only mortgages are a type of mortgage where the regular payments only cover the interest that is due. The full capital amount remains outstanding during the mortgage term and is repaid in one lump sum at the end of the term.

Lenders require evidence that a customer will have in place a clear credible repayment strategy and that the repayment strategy has the potential to repay the capital borrowed.

Repayment strategies may include investment product(s), pension(s), periodic repayment of capital from irregular sources of income (i.e. bonuses), the sale of another property or other land or other acceptable methods which meet lending criteria. It will not normally be appropriate to use deposit accounts as a repayment strategy as the rate of interest charged on the mortgage is normally greater than the interest earned on the deposit.

This means that the mortgage payments made each month to the lender will be lower than those of a repayment mortgage for a similar loan and term. However, borrowers must remember that the cost of their repayment vehicle/strategy needs to be taken into account when calculating the overall costs of the mortgage arrangement and especially when comparing those costs to the cost of borrowing on a capital & interest basis.

Having decided on the loan repayment method, the borrower then needs to consider what kind of mortgage they want. The main options, some of which may or may not be available depending on the mortgage market and general economic conditions prevailing at the time, are described below.