As with any lender, when you take out your mortgage with us, you will need to select the term of your mortgage (25 years, for example). You will need to have paid off your mortgage by the end of this term so it is important that you understand how your mortgage is to be repaid. A mortgage consists of two main components, the capital sum and interest. Interest is an amount of money charged by the lender for advancing the mortgage, expressed as a percentage of the mortgage balance.
With a Skipton mortgage you have a choice of payment methods. One of our mortgage advisers will be pleased to talk to you about this. To enable you to have the facts and figures you need, you will receive a Mortgage Illustration, which will outline the level of payments for the mortgage, as well as what might happen if rates increase. The Mortgage Illustration will also show any early repayment charges which may apply if you wish to redeem your mortgage within the product period.
Repayment or interest only?
A repayment mortgage involves repaying both the interest and the capital borrowed, so that, over the term of your mortgage, you will have paid off the loan and all 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. If all the payments are made in full and on time, with an interest only mortgage, your payments will be lower, but you’ll need to have a strategy to repay the capital (i.e. the loan) at the end of the mortgage term. Our interest only option is only available to certain customers - your mortgage adviser will be able to provide you with detailed information.
Repayment (capital and interest)
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 monthly payments will be geared more to paying off the interest, whilst in later years, more of your monthly payments will be repaying the capital sum.
As long as you make all the monthly payments in full and on time, 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 loans can be considered for mortgages and remortgages (except first time buyers) which meet the following criteria:
Maximum loan amount of £500,000
For loans above £500,000 the first £500,000 can be on interest only with a suitable repayment strategy but any amount above must be on a capital and interest basis; and
For Residential, maximum LTV 70%
For LTVs up to 80% the first 70% can be on interest only with a suitable repayment strategy, but any difference must be on a capital and interest basis.
For LTVs over 80% the entire loan must be on a capital and interest basis; or
- For Buy to Let, maximum LTV 75%
- Minimum loan applicant income of £40,000.
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. The following repayment strategies will be considered:
- investment holding (i.e. endowment policy that has a projected value sufficient to repay the loan);
- other assets (i.e. stocks and shares portfolio, investment property portfolios that have a value sufficient to repay the loan); or
- equity in another property.
The value of the above vehicles must show that they have sufficient funds within them to repay the loan, or the ability to increase in value sufficiently over the term of the mortgage.
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. 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 strategy.
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.
Part and part
You may wish to consider having part of your mortgage on interest only and part on repayment. You should note that it is your responsibility to ensure all of the mortgage is repaid by the end of the term. You will need to have a repayment strategy in place to enable you to pay off the part of the loan on interest only.
Our mortgage advisers can talk you through the various options available.
Considering the length of your mortgage term
While you would typically expect to repay your mortgage over 25 years, in some circumstances it could be more appropriate for you to take a shorter term, or a longer one.
A shorter term may mean your payments are higher but could substantially reduce the amount of interest you pay on the loan overall.
A longer term would enable you to reduce your monthly payments, but would increase the amount of interest paid overall. However, you should consider the length of term in relation to your retirement, when your income is likely to reduce. This may impact on the term of mortgage available to you and we will need to check the level of income you are likely to receive in retirement if the term extends into retirement.