Mortgage is a long term
commitment which on the average can span up to 25 years. Your mortgage is made
up of two parts
(1)
The capital ( The amount you request your building society lend you)
(2)
The interest ( This is the amount the bank or building society charge for
lending you the money)
The
ultimate aim of the average person taking out a mortgage is to pay off the
capital borrowed plus interest at the end of the agreed term..
For
example you approach your financial service provider to lend you £100 000
(capital) to purchase a property which hopefully after going through your
application is agreed to. You work out it will take you 20 years to pay
back, so your lender work out how much it will cost to lend you that amount over the 20 years
and charges you accordingly.
There are primarily two methods you can choose from to repay your mortgage
(1) You can decide to choose the capital repayment method, using this method you pay back the capital plus interest borrowed gradually every month but because you are paying back both the capital and interest it might feel like you are only paying back the interest as only very little capital is put back. However if you are able to keep up with monthly repayments, you are almost guaranteed to pay back both capital and interest at the end of the term and in the unlikely event that interest rates stay the same then your monthly payments stay the same.
Simplified Illustration
Loan =
£100 000
Interest
rate = 3%
Term =
20 years
using
the BBC mortgage calculator the
minimum monthly repayment will be £560.13.
However
bear in mind that should the interest rate change so will your monthly
repayments, so assuming interest rate changes to 10% then monthly repayments
becomes £978.83.
(2)
The second method for repayments is the interest only.
Using this method
you only pay back a part of the interest every month with the lump sum
outstanding.This method is only ideal for risk takers who have a back up plan
because the full outstanding sum must be paid back at the end of the agreed
term. Please bear in mind your mortgage provider has every right following
legal process to repossess your house in the unfortunate event that you are
unable to pay back. Monthly repayments are usually lower than when paying back
both capital and interest, but unlike the repayment method the guarantee of
fully repaying the mortgage at the end of the term is not there.
Illustration
Loan =
£100000
Interest
rate = 3%
Term =
20 years
Minimum
monthly repayments will be £250 with the original £100000 still outstanding
throughout the mortgage term.