Mortgage Payments: Ins and Outs of Your Biggest Outgoing
How much you borrowed and for how long, plus other terms of the deal, play the largest part in your mortgage payment amount.
Once you've taken out a mortgage you will need to make regular monthly repayments for the term of the loan. But a number of factors play a part in determining exactly what your mortgage repayments look like.
Here are a few to consider:
The size of your loan and the interest rate
These are fairly self-explanatory. The bigger your loan, the larger your repayments will be.
Similarly, as the interest rate changes, so too will the size of your monthly mortgage bill. This is why many borrowers opt for fixed-rate mortgages, which guarantee your repayments will not change for a specific period of time — typically two or five years, but sometimes as much as 10.
The mortgage term
When you take out a mortgage, you agree to a specific term over which you will repay the debt. The longer the mortgage term, the lower the monthly repayments will be. However, by paying the debt off over a longer period, the overall cost of repaying the loan will be higher.
» MORE: Guide to mortgages
Take the example of a £100,000 mortgage with a 3% interest rate. Over a 25-year term, you would have monthly repayments of £474, and it would cost you £142,263 overall.
But over a 30-year term, while repayments would drop to £422 a month, the overall cost of the loan would increase to £151,777.
Repayment vs interest-only
The vast majority of borrowers use a repayment mortgage, where each month you pay off some of the balance you’ve borrowed as well as interest charged on the loan. As a result, when you get to the end of your mortgage term the loan is paid off entirely and you own the property outright.
However, some borrowers have an interest-only mortgage, which means the money they pay each month covers just the interest charge on the loan. While this is cheaper on a monthly basis, it does mean that when the mortgage term ends you will need to pay off the entirety of the money borrowed.
To take our example above, over a 25-year term the monthly repayments will drop to just £250. However at the end of the 25 years you would need to repay in one go the £100,000 you initially borrowed.
The risk with this type of mortgage is that if you do not have enough money saved to repay the loan at the end of the term, you may have to sell your home. So while interest-only mortgages were popular in previous years, and plenty of borrowers still have them, they are now much harder to come by. Not all lenders offer them, and those that do will expect you to have a sizeable deposit and will want evidence of your repayment strategy.
Some lenders will allow you to ‘mix and match’ by taking out a mortgage that is part repayment and part interest-only.
» COMPARE: Repayment mortgages
When are mortgage payments due?
Mortgage payments are made on a monthly basis. You don’t have to make them at the start of the month either; you can set the date with your lender so that it comes out of your account at the most convenient time. Just after payday is usually a good choice. You may be able to change that date later on, should your circumstances change, too.
It’s important to note that your first repayment will usually be larger than the following monthly repayments. This is because it includes an initial interest payment covering the days between you buying the property and the end of the month.
How are mortgage payments made?
When you apply for your mortgage, you need to specify a bank account from which the monthly payments will be made. These payments are then made by direct debit each month.
» MORE: How much mortgage can I afford?
Can I overpay on my mortgage?
Most mortgages allow you to overpay by a certain amount — usually up to 10% of the outstanding mortgage balance — each year without hitting you with additional charges. But check with your lender first.
This is a great idea if you can afford it, as you will pay off the mortgage earlier and save thousands in interest charges in the process.
Source: Getty Images
John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more