A mortgage is a loan which is taken out in order to buy property or land. The terms that they run for can vary, with the average mortgage lasting 25 years, according to the Money Advice Service. Its website states: “The loan is ‘secured’ against the value of your home until it’s paid off.” If the borrower cannot afford to keep up the repayments, then the lender is able to repossess the home and sell it in order to get their money back.
The money that is borrowed is known as the capital.
The lender will then charge interest on this money until it is repaid.
Depending on which type of mortgage one applies for will mean they may end up repaying only the interest, or interest and capital.
What is a repayment mortgage?
A repayment mortgage is where the interest and part of the capital is paid off each month.
Upon the end of the term, the borrower should have managed to pay it all off and own the home.
What is an interest-only mortgage?
An interest-only mortgage differs to a repayment mortgage in that the borrower only pays the interest on the loan.
They do not pay off the capital.
It’s down to the lender as to how they will repay the original loan at the end of the mortgage term.
The Money Advice Service said on its website: “These mortgages are becoming much harder to come by as lenders and regulators are worried about homeowners being left with a huge debt and no way of repaying it.”
The Money Advice Service has also addressed the combination of repayment and interest-only mortgages.
“You can ask your lender if you can combine both options, splitting your mortgage loan between a repayment and interest-only mortgage,” it stated.
Statistics released this week by Legal & General Mortgage Club showed that a third of borrowers are unaware of the role that mortgage advisers play.
In a survey of 2,000 UK homeowners, nearly a third of participants (31 per cent) who went direct to a lender, said that they didn’t understand how these advisers could hep with their search.