Once their mortgage application has been accepted in principle, the borrower may have the option of deciding how they repay their loan: on a ‘capital and interest’ basis, on an ‘interest-only’ basis, or as a combination of these two.
Capital and interest mortgages
An arrangement where part of the monthly repayment is used to pay the interest and the remainder is used to reduce the original amount of the loan. In the early years of the mortgage, most of the monthly repayment goes towards paying the interest; in later years, the interest charges diminish and more of the repayment is available to reduce the loan amount.
Interest-only mortgages
All of the monthly repayment (which will be lower than a capital and interest repayment) is used to pay the interest on the loan, and therefore the capital does not reduce.
Lenders require evidence that a customer will have in place a clear, credible repayment strategy and that the repayment strategy has the potential to repay the capital borrowed.
Repayment strategies may include deposits or investment product(s), pension(s), periodic repayment of capital from irregular sources of income (i.e. bonuses), the sale of another property or other land, or other acceptable methods which meet lending criteria.
Where the repayment of capital is an investment, the investment runs alongside the mortgage but is separate from it. The cost should be taken into account when calculating the overall costs of the mortgage arrangement.
Once their mortgage application has been accepted in principle, the borrower may have the option of deciding how they repay their loan: on a ‘capital and interest’ basis, on an ‘interest-only’ basis, or as a combination of these two.
Capital and interest mortgages
An arrangement where part of the monthly repayment is used to pay the interest and the remainder is used to reduce the original amount of the loan. In the early years of the mortgage, most of the monthly repayment goes towards paying the interest; in later years, the interest charges diminish and more of the repayment is available to reduce the loan amount.
Interest-only mortgages
All of the monthly repayment (which will be lower than a capital and interest repayment) is used to pay the interest on the loan, and therefore the capital does not reduce.
Lenders require evidence that a customer will have in place a clear, credible repayment strategy and that the repayment strategy has the potential to repay the capital borrowed.
Repayment strategies may include deposits or investment product(s), pension(s), periodic repayment of capital from irregular sources of income (i.e. bonuses), the sale of another property or other land, or other acceptable methods which meet lending criteria.
Where the repayment of capital is an investment, the investment runs alongside the mortgage but is separate from it. The cost should be taken into account when calculating the overall costs of the mortgage arrangement.
A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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Pedr Financial Planning is an appointed representative of TenetConnect, which is authorised and regulated by the Financial Conduct Authority. TenetConnect is entered on the Financial Services Register (www.FCA.org.uk) under reference 149826. Registered office: 20 High Street, Lampeter, Ceredigion, Wales, SA48 7BG. Registered in England & Wales: 07048010.
The Financial Ombudsman Service is available to mediate individual complaints that clients and financial services businesses aren't able to resolve themselves. To contact the Financial Ombudsman Service please visit: http://www.financial-ombudsman.org.uk/contact/index.html
The guidance provided within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
