A mortgage will likely be the biggest and most expensive financial commitment you ever make. Therefore, whether you’re a first-time buyer or already several rungs up the property ladder, you should make sure you understand as much as possible about your mortgage, including your repayments, before submitting your mortgage application.
Our mortgage repayment guide will look at the factors that affect your mortgage repayments including mortgage affordability, your circumstances and the terms of your deal; your options for paying your mortgage off early, and what lenders consider when they calculate mortgage repayments.
In this Guide, We Will Cover the Following Topics:
- How Do Mortgage Repayments Work?
- What Determines Mortgage Repayments?
- How Are Mortgage Interest Rates Calculated?
- How Does the Lender Decide What Rate to Offer Me?
- How to Secure a Better Mortgage Rate
- How Do Mortgage Lenders Calculate Mortgage Repayments?
- How Can I Quickly Work Out My Monthly Repayment?
- What Are Mortgage Overpayments?
- What Happens if You Default on Your Mortgage Repayments?
- What Is a Mortgage Early Repayment Charge?
- Can I Reduce My Monthly Mortgage Repayments?
- Mortgage Repayments: Summing Up
How Do Mortgage Repayments Work?
Mortgage repayments are the regular payments a borrower makes to the mortgage lender in order to pay back the amount borrowed on the mortgage. These are also known as capital payments as they go towards paying off the capital loan amount.
At the same time you make your mortgage repayments, you’ll also make interest payments. Interest payments are calculated by working out a percentage of the outstanding loan balance.
Together, your mortgage repayments and interest payments make your mortgage payments. You make your mortgage payments regularly, often monthly, over the course of the mortgage term.
In the early years of a mortgage, a larger portion of the payments goes towards paying the interest. Meanwhile, a smaller portion goes towards paying off the principal. As the loan balance decreases over time, so does the amount of interest charged, resulting in the portion of the payment that goes towards paying off the principal increasing. This essentially means that the rate at which you pay off your mortgage accelerates.
Repayment Mortgages vs Interest-Only Mortgages
In the UK, there are 2 main types of mortgage: repayment and interest-only
- A repayment mortgage requires the borrower to make regular payments that will fully repay the loan over the term of the mortgage. These payments comprise both interest and principal payments. As the outstanding loan amount reduces over the term of the mortgage, so does the amount you pay in interest
- An interest-only mortgage only requires the borrower to make payments towards the interest on the loan for the mortgage term. As the outstanding loan amount doesn’t reduce, neither does the amount you pay in interest. At the end of this period, the borrower must pay off the remaining balance of the loan, via a suitable repayment vehicle such as the sale of the property or a separate savings plan
What Determines Mortgage Repayments?
Several intertwining factors determine mortgage capital repayments and interest payments, including the following.
Your Monthly Outgoings
As part of your mortgage affordability checks, a lender will use a mortgage income multiplier to work out your maximum borrowing, then they’ll work out what they can actually lend to you based on what you can afford in monthly mortgage payments (capital and interest). They do this by looking at your monthly income and outgoings and carrying out stress tests. The more disposable income you have, the more you can afford in mortgage payments – which can allow you to borrow closer to your maximum borrowing or give you access to a shorter term (and therefore less interest payments in total).
It may seem confusing to start with what you can afford in mortgage payments before determining the actual details of the mortgage payments (like amount and interest rate) but this gives the lender the scope they need in order to determine the deal they’re willing to offer you, which in turn will inform the mortgage payments.
The Loan Amount
Now for something much simpler: the larger the mortgage, the bigger your mortgage payments will be (if all other details of the mortgage such as term and rate remain the same). This is simply because there’s more to pay back to the lender.
The Interest Rate
The interest rate on the mortgage will affect the amount of interest paid over the life of the loan and, therefore, the size of the mortgage payments. Borrowers can choose between fixed rate and variable-rate mortgages, with fixed rate mortgages having an interest rate that remains the same over an agreed period and variable rate mortgages having an interest rate that can fluctuate slightly in line with the Base Rate or the lender’s SVR (standard variable rate).
The Loan Term
The loan term, or the length of time over which the loan will be repaid, will also affect the size of the capital mortgage repayments and the interest paid. A longer loan term generally means smaller monthly payments, while a shorter loan term will result in larger monthly payments. However, a longer term will likely result in more interest paid overall, while a shorter term will likely result in less interest paid overall. Talk to a mortgage adviser to find out which is more suitable for you on 0330 433 2927.
The Type of Loan
Repayment mortgages require the borrower to make regular payments that will fully repay the loan over the mortgage term. In contrast, interest-only mortgages only require the borrower to make payments towards the interest on the loan for a certain time. This means that your monthly payments will be lower on an interest-only mortgage, but you’ll end up paying more interest overall.
The Deposit
Borrowers typically have to pay a deposit of 5% - 10% of the property's value, which reduces the size of the loan and monthly payments.
Mortgage Fees
You can opt to pay fees – e.g. lender’s product fees, arrangement fees, etc. - up front or add them to the loan. If you opt to add the to the loan then they’ll increase your monthly payments and you’ll pay interest on them.
How Are Mortgage Interest Rates Calculated?
Mortgage interest rates are typically set using the lender's SVR (standard variable rate) or the Bank of England's Base Rate. Lenders decide their rates themselves but when they price their products they’re influenced by external factors such as SWAP rates, market pricing, demand, existing mortgage book, competitors, etc.
To learn more about different mortgage rates see our Mortgage Types Explained guide.
How Does the Lender Decide What Rate to Offer Me?
Ultimately, it’s down to the lender and their criteria when deciding what mortgage deal and interest rate from their catalogue of products to offer you. Factors such as your credit score, deposit amount and the kind of property you’re after can all impact the rate you’ll be offered.
How to Secure a Better Mortgage Rates
Provide a Larger Deposit
The bigger your deposit, and the lower your mortgage LTV (loan-to-value), the less risk assumed by the lender. The lower the risk, the more competitive the deals available to you
Improve Your Credit Score
A clean credit history will indicate to the lender that you’re a reliable borrower, which again means less risks for them – and lower rates for you. Pay off debts, set up direct debits to pay bills on time, register on the electoral roll and more to improve your credit score.
Avoid Non-Standard Construction or Specialist Properties
Unusual or non-standard construction properties can be seen as less reliable forms of security for the lender. To compensate for this risk, lenders may offer higher rates. Keeping it simple when house-hunting could help you secure a better deal.
Use a Mortgage Broker
Getting advice from a mortgage broker such as John Charcol is the simplest way to ensure you secure the best deal for your situation. We’re experts, we know the mortgage process inside and out and we know which lenders are offering which deals – and what criteria they consider. We’ll tell you which deal is right for you and then help you secure it – so you can focus on the fun parts of moving home. Contact us on 0330 433 2927 to get started.
How Do Mortgage Lenders Calculate Mortgage Repayments?
Mortgage repayments are calculated by taking the following into account:
- Loan amount
- Interest rate
- Loan term
- Repayment frequency
- Repayment type
How Can I Quickly Work Out My Monthly Mortgage Repayment?
A quick and easy way to work out your monthly mortgage repayments is with our mortgage repayment calculator, which uses your loan amount, mortgage term, and interest rate to calculate how much your monthly payments might be.
If you’re not sure on the loan amount, term or rate yet then first you can use this calculator to determine how much you can borrow and then compare first-time buyer deals currently on the market with our best buys.
What Are Mortgage Overpayments?
Mortgage overpayments refer to when a borrower makes additional payments towards their mortgage above the regularly scheduled monthly payments. Additional payments can reduce the principal balance of the loan, which can help to lower the total interest paid over the life of the loan and help to shorten the loan term or lower the monthly payments (if the term stays the same). If you want to opt for lower monthly payments, rather than a shorter term, make sure you clarify this with the lender so they can recalculate your monthly payments.
Borrowers can make overpayments on their mortgages in various ways, such as by making larger payments each month, extra payments each year, or lump-sum payments. Most mortgages in the UK have overpayment options. However, some lenders may restrict the amount in overpayments that can be made, and some may charge a fee for overpayments.
Making overpayments on a mortgage can be a good financial decision for borrowers who have extra cash on hand or expect to receive a windfall, such as a bonus or an inheritance. By paying off a portion of the principal balance early, borrowers can save thousands of pounds in interest over the life of the loan and become mortgage free sooner.
Speak to your John Charcol mortgage adviser about deals with overpayment facilities if this is something you’re interested in as we’ll be able to make sure we match you with a lender that’s able to offer this. We’ll also explain any restrictions and fees associated with overpayments so you know exactly what to expect.
What Happens if You Default on Your Mortgage Repayments?
When a borrower defaults on their mortgage, it means they have failed to make the required payments on their loan according to the terms agreed upon in the mortgage contract. If a borrower misses a mortgage payment, the lender will typically send a late notice and may charge a late fee. If the borrower continues to miss payments, the lender will begin the process of repossession.
Repossession is the legal process by which the lender reclaims the property that was used as collateral for the loan. The lender will first send a notice of default, which informs the borrower that they are in default and that the lender intends to repossess the property if the missed payments are not made. If the borrower cannot make up the missed payments, the lender will proceed with repossession. This process generally involves the lender selling the property and using the proceeds from the sale to pay off the outstanding mortgage debt.
Defaulting on a mortgage can have serious consequences for your credit score and your ability to get approved for credit in the future. It can also result in you losing your home and any equity you have.
If you’re concerned about defaulting on any mortgage payments, speak to your lender. They may be able to work with you to find a better solution.
What Is a Mortgage Early Repayment Charge?
A mortgage early repayment charge or ERC is a fee that some mortgage lenders in the UK may charge to borrowers who wish to pay off their mortgage before the end of its term. The fee is typically a percentage of the outstanding mortgage balance. It’s used by lenders to compensate for the interest they would have earned if the borrower had stayed with the mortgage until the end of its term.
The ERC is usually only charged if the borrower wants to pay off a significant amount of the mortgage balance before the end of the introductory deal, typically more than 10% of the original loan amount. ERCs can vary depending on the lender and the mortgage product. It can be calculated as a percentage of the outstanding mortgage balance, a fixed fee, or a combination of both.
It's always best to check with your broker or lender regarding the ERC policy in case you want to pay off your mortgage early. Some lenders might offer options to make overpayments or have a flexible mortgage that allows you to make early payments without charges – our advisers can direct you towards lenders with these facilities if this is something you’re interested in.
Can I Reduce My Monthly Mortgage Repayments?
Yes, there are several ways to reduce your monthly mortgage repayments. Some options include the following.
- Remortgage – if you’re coming to the end of your introductory deal and want to avoid your lender’s more expensive SVR, you can consider switching to a new mortgage with a lower interest rate, which will reduce monthly payments
- Extend the term - extending the term of your mortgage will lower your monthly payments but increase the overall interest paid on the loan
- Interest-only mortgage – opting for an interest-only mortgage will lower your monthly payments but will require you to pay off the full loan amount at the end of the term
- Overpayments – you may be able to make overpayments to your mortgage, which can reduce the overall interest paid and either shorten the mortgage term or lower your monthly payments
- Borrow less – obviously, the less you borrow, the less you have to pay back. This can result in lower monthly payments (and less interest charged overall)
It's important to consider the long term consequences of these options and talk to your mortgage broker to see which option is best for you. Some options may have associated fees, so it's important to consider these costs as well.
Mortgage Repayments: Summing Up
Manageable monthly payments are an important part of your mortgage as you could be repaying your mortgage for several decades. To learn more about mortgage repayments or kickstart your house-buying journey, get in touch with our team of expert mortgage advisers at John Charcol.
With our extensive market knowledge, we can help you identify which lenders to apply to, and guide you through the entire mortgage application process.