Once you’ve secured a mortgage and paid the fees that are needed during set up, you can begin to pay off the mortgage itself.
Parts of a mortgage
There are two main parts of a mortgage to pay: the loan and the interest on the loan.
The loan is the money that pays for the majority of the property value. If a property has a value of £100,000, and the deposit was 15%, then the buyer would have to borrow £85,000 (85%) to pay for their new home.
Over the term of the mortgage, the loan gets paid back. If it is a repayment mortgage (see below), it is paid back via monthly payments.
Interest is the money charged per month on the portion of the loan that remains unpaid. It is worked out as a percentage. The interest rate can change, if the mortgage deal is a variable rate mortgage, or stay the same, if it is a fixed rate mortgage.
If you’re getting a mortgage, you should make sure you know what interest rates you should be expecting to pay, as this rate could push you over budget.
There are several methods of repayment that can be offered. Make sure you understand how you will be repaying your mortgage.
Repayment mortgages are the most common and by far the most popular. Each month, someone who has borrowed a repayment mortgage will pay back an amount of the overall money borrowed, plus interest.
The repayment amount is worked out depending on the term of the mortgage, so that by the time the mortgage comes to an end, it will be all paid off.
Interest payments are added on per month.
Interest only mortgages
An interest only mortgage is arguably a riskier type of mortgage. They tend to be cheaper in the short term, as the borrower doesn’t have to pay back any of the loan that they initially borrowed until the mortgage term is up.
Each month, the borrower will have to only pay back the interest payments for the loan, and not have to pay off any of the loan itself.
The loan is paid off at the end of the mortgage term, in one big sum.
This can be risky. Although the borrower will have much smaller bills per month than a person with a repayment mortgage, they will have to pay out the value of the property (at the time of purchase) to the lender at the end of the mortgage term.
This is usually done by selling the property on, and using the money from that to pay off the loan from the mortgage in one go.
The very real danger of this is if the property falls into negative equity. Should the value of the property decrease during the mortgage term, the owner will not be able to sell it on for the original amount they borrowed, meaning they will have to find extra cash from elsewhere to pay off 100% of the loan.
Calculating mortgage repayments
Repayments are calculated by ensuring that the whole mortgage will be paid back by the end of the term, plus the interest (assuming there are no specific factors to the mortgage, like on a discount mortgage).
You can use our Mortgage Repayment calculator to see what you are likely to have to pay back per month on any given mortgage.