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How mortgage repayments work

Successfully getting a mortgage is just the part of the battle when you set out to become a homeowner, the other key part is planning how you are going to repay the money that you have been lent. Mortgage repayments come in different shapes and forms and depending on which mortgage you choose or are offered, you may find yourself paying back very different amounts.

We take a look at the basics of mortgage repayments and consider what to think about when planning how you are going to pay off your mortgage.

Interest only vs. repayment mortgages

There are two main ways of paying off a mortgage – there are ‘interest only’ mortgages and ‘repayment’ mortgages, also known as ‘capital repayment’. Repayment mortgages mean you pay off both the capital that was lent to you and the interest accrued, in a series of monthly payments over an agreed term.

Interest-only repayments are exactly what they sound like, the repayments you make each month cover only the interest accrued on the amount lent. By the end of the loan term you will be required to pay back the entire capital. These mortgages are less common as they require a separate arrangement for how the capital is going to be paid back. They are also more expensive, as the interest paid is based on the entire amount lent, whereas with repayment mortgages the initial amount is gradually reduced as more payments are made.

What affects the size of your mortgage repayments?

You can read more in-depth coverage on the different types of interest rate in our types of mortgage article, but the two main types of interest rate are fixed and variable. Other than the cost of your new home, the interest rate will have the biggest impact on the size of your repayments. Fixed interest rates will stay the same throughout the duration of your mortgage period, whereas tracker mortgages will fluctuate based on pre-agreed variables.

The size of your mortgage deposit will also affect the size of repayments and the types of mortgage you can get. A larger deposit will mean less risk for the lender, as the overall loan will be smaller, this may lead to a preferential rate or more flexible terms. This is also true when it comes to the length of the agreement; typical repayment periods are between 25 and 35 years, but can be shorter or longer. A longer period will usually mean lower repayments as they are more spread out, but could also mean you pay a higher amount overall. Learn about different ways to save for a mortgage deposit

Your credit report can also influence the mortgage and interest rate you are offered by banks and building societies. If you have had issues with credit in the past, such as a missed payments or more serious problems like bankruptcy or County Court Judgements (CCJs), this may mean you require a higher deposit or will only be offered higher rates of interest. Find out about getting credit-ready before applying for a mortgage.

What are mortgage overpayments?

Overpayments are when you pay more than the minimum required to meet your monthly repayment schedule. This may be because your earnings have grown, you’ve received an inheritance or because an investment has matured and you have extra money to put towards paying off the mortgage.

Overpayments can be advantageous for homeowners as they reduce the total capital left to pay and therefore the amount of interest you will be paying. There are usually limits on how much you can overpay in any given year, most lenders allow overpayments of up to 10% during your introductory period, though this can vary.

Overpayments are typically suitable for people who do not have other debts, particularly debts that are more expensive to pay back than the mortgage. If the cost of paying off other debts is more than you would save by overpaying your mortgage, then it would not be financially prudent to overpay. This also applies to situations where interest from savings or investments returns a greater amount than would be saved by overpaying.

What happens if you default on your mortgage repayments?

If you are unable to keep up your mortgage repayments the lender may eventually seek to repossess your home. This is usually a last resort as lenders would rather avoid the costs and potential losses of legal action if they can work with a homeowner to find an alternative. If you miss payments for more than a couple of months, you should really seek advice from organisations like Step Change or the Citizen’s Advice Bureau and also contact your lender to tell them what is happening.

There are different options depending on your circumstances, you may be able to take a payment holiday if your financial issues are temporary. This will give you a break from repayments, but you will still have to pay them eventually. You may also be able to switch to an interest only mortgage, but as discussed above, you will still need to repay the capital by the end of the mortgage term.

It may also be possible to get support from the government, you can read more about Support for Mortgage Interest (SMI) here.

If you are interested in checking details of past repayments and other aspects of your credit history, you can get online access to your credit report with your Equifax Credit Report & Score, which is free for 30 days and £14.95 a month thereafter.

Homebuyer's Handbookpdf file: Link opens a new tab/window