Repaying your mortgage
With a repayment mortgage you make monthly repayments for an agreed period (this is known as "the term") until you've paid back the loan and the interest.
With an interest only mortgage you make monthly repayments for an agreed period but this will only cover the interest on your loan. You'll normally also have to pay into another savings or investment plan that'll hopefully pay off the loan at the end of the term.
You will need to choose one or maybe a combination of savings and investment plans to cover the capital part of your mortgage. There are many around but to name a few, you can take out an ISA, an endowment or even use tax free cash from your pension plan.
It is crucial that you regularly review your savings or investment plan to ensure that it is performing as expected and will pay out enough money to repay the mortgage at the end of the term.
If your savings plan doesn't do so well, you will be left with a shortfall.
In most cases, you may be tied into a particular mortgage product for an agreed period. If you try to pay off your mortgage during this period then, in some cases, a penalty called a "redemption charge" may apply.
At the end of the agreed period you will then have the choice of staying with the same lender or switching to an alternative lender (this is known as "remortgaging"). If you stay with the same lender, then you will normally be automatically put onto their standard variable rate which may be higher or lower than, for instance, a fixed rate you have been paying for years. So watch out for this and make sure you can cope with any changes to your monthly repayments.
Top tips
- Make sure you check that the savings plan matures at the same time as your mortgage term ends. It's no good choosing a plan that will pay out the money you need in 30 years time, if your mortgage term is only 25 years.
- If you are planning on remortgaging, don't leave it to the last minute or you might miss out on the best interest rate deals. You can start looking into what's available around three months before the agreed period ends.
- You might like to take in a lodger to help pay the mortgage. The income you receive is tax free up to certain limits through the rent a room scheme.
- Whichever savings plan you choose, it is very important that you monitor its progress, so that if it starts underperforming you can think about switching to a policy that would hopefully give a better return or maybe arrange an additional investment plan.
- Many people stay with the same mortgage provider for years, partly because it is difficult and time-consuming to re-mortgage. However, there are often good deals to be had if you do switch or your existing provider may even offer you a better deal if they think you are likely to change provider!