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Five Questions On: Mortgages

Kate Murphy,Moneysupermarket.com
Saturday 17 April 2010 00:00 BST
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How can I repay my mortgage?

There are two main options when it comes to paying off your mortgage: capital repayment and interest-only.

What is capital repayment?

If you choose to pay back your mortgage using this method you will be paying back the interest that you owe as well as some of the capital. At the end of the mortgage term you will have paid off the mortgage in full with no lump sum to owe.

What about interest-only?

As the name suggests, with this option your monthly payment covers only the interest that you owe on that debt. The idea is that you have to have some form of repayment vehicle, such as an ISA, running alongside your mortgage so that when the term ends you have built up enough money to repay the original loan.

Why are lenders strict with their criteria for interest-only loans?

If you choose to go interest-only your monthly mortgage payment is lower because you are not repaying capital. In theory, this shouldn't actually be much cheaper on a monthly basis because you'll also be putting some money aside in an investment. However, many people have viewed interest-only mortgages as a cheaper option and have no repayment plan in place. With many lenders facing rising levels of bad debt, they're taking a tougher stance on interest-only loans.

To encourage people to opt for repayment loans, Halifax is charging a higher rate to those who go interest-only.

Other lenders have also tightened criteria. Some require proof that you have a repayment plan in place, while others will only consider lending on an interest-only basis to those with a significant amount of equity in their home.

What if my mortgage is interest-only?

If you have an interest-only mortgage and are happy that you have a reliable repayment plan in place, there is nothing to worry about. If however, you went interest-only to keep your mortgage costs down and have made no provision to repay the capital, then consider switching to a repayment loan.

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