You will need to have paid off your mortgage by the end of the term. It is important for you to understand that your mortgage is made up of two main components:
- the capital sum (ie the amount you borrow to buy your home), and
- the amount of interest due on the capital sum over the period of the mortgage term (eg 25 years).
With a Skipton mortgage you have a choice of repayment methods:
Repayment (capital and interest)
This is the most popular method and the route most borrowers prefer to take in order to be sure the loan is fully repaid at the end of the term.
Your monthly payments cover both the repayment of the capital sum borrowed and the interest due on your loan. In this way, you gradually pay off the full amount of your mortgage over the term. In the early years, your payments will be geared more to paying off the interest, whilst in later years, most of your payments will be repaying the capital sum.
As long as you make all the monthly payments, you can be certain that the whole loan will be repaid by the end of the term. However, your monthly payments are likely to be at a higher level than the interest-only payment option although overall you will pay less interest. You should also consider the cost of life cover to repay your mortgage in the event of your death which will protect your family or dependants from liability for the mortgage.
Interest-only
Your monthly payments cover only the interest due on your loan. Therefore you will need another means of repaying the capital borrowed by the end of the mortgage term. Repayment of the capital sum can be from a separate savings plan or investment, such as those shown below:
- Pension - this is intended to repay the mortgage at retirement, when a certain proportion of funds accumulated in a pension plan may be taken as a lump sum, currently free of income tax and capital gains tax.
- Individual Savings Account (ISA) - this is a tax-free savings account.
- Endowment policy - this is a specialised long-term investment which also provides life cover during its term.
However, you must be aware that the value of investment plans can go down as well as up and cannot be guaranteed on maturity. This makes an interest-only mortgage a more risky option than a repayment mortgage.
Sometimes you may have or anticipate having capital available such as a possible inheritance. You are not obliged to take a repayment vehicle in connection with your loan but you should not over-rely on a means of payment that may only be a possibility. It is your responsibility to make sure you have enough money to repay the loan at the end of its term.
As you will only pay interest, your monthly payments will be lower compared to the repayment method, but you also need to take into account the cost of any savings vehicle.
By taking this option your mortgage balance will not decrease, so there will be more interest overall to be paid, compared to the repayment method.
Speak to a mortgage adviser to discuss all the features associated with these payment methods. For specific advice on existing or new investment plans to repay your mortgage, you will need to speak to an independent financial adviser. We can refer you to Skipton Financial Services Limited, our wholly owned subsidiary.
Life cover
Skipton can arrange life cover which gives you the peace of mind of knowing that your outstanding mortgage balance will be repaid if you die. So no matter what, your spouse or family won't have to assume your liabilities. Our range of insurance policies gives you the peace of mind which comes from knowing that your home, and therefore your family's future, is taken care of.
Length of mortgage term
Typically you would expect to repay a mortgage over 25 years. In some circumstances however, it could be more appropriate for you to take a shorter mortgage - or even a longer one. For example, a shorter mortgage of say 15 or 20 years may be worth considering if you can afford it. Your payments are likely to be higher if your term is shorter, but this may substantially reduce the amount of interest you pay on the loan. You may also need to consider the length of the term in relation to your retirement when your income may reduce. Please talk to us about the options that are available to you and we will be happy to advise.