Purchase Mortgages
Choosing the right mortgage is a big decision. Understanding your options can help you make the best choice for your circumstances.
What is a purchase mortgage?
A purchase mortgage is a loan, from a bank or building society, used to buy a property, with the property itself serving as collateral until the loan is repaid. When choosing a mortgage, understanding the different repayment options is crucial. Here’s a breakdown of two common types:
Repayment mortgages
A capital and repayment mortgage is the most common type offered by most lenders today. As you make payments against your mortgage, the amount you owe goes down.
- You’ll make monthly repayments off the amount you borrowed (known as the 'capital'), over an agreed period (known as the ‘term’).
- Payments are made up of the interest charged on your mortgage, as well as paying off the actual amount borrowed.
- As long as you keep up with your repayments, your mortgage will be fully paid off by the end of the term.
How does it work?
- You initially pay more interest on a mortgage because the outstanding loan balance (principal) is higher at the beginning, and interest is calculated on this balance.
- As your payments start to pay off loan, your outstanding balance decreases, leading to lower interest payments over time.
- Eventually, you'll reach a point where more of your monthly payment goes towards the outstanding loan, than the interest, known as the "tipping point".
- The longer you have a repayment mortgage for, the more you will end up paying in interest. Which is ideal for the lender – but not for you, the borrower. At Frankly we recognise this and will work with you, and your budget, to ensure that you have the right term for your circumstances. No one size fits all with us.
Interest only mortgages
With an interest only mortgage, your monthly payments are made up purely of the interest on the loan amount. This means that:
- Your monthly payments will be significantly lower than with a repayment mortgage, and, therefore, much more affordable.
- However, at the end of the term, you’ll need to repay the full mortgage amount in one go. Most lenders will want to know how you plan to do this.
How does it work?
- Your payments are only paying off the interest the lender is charging on the amount you borrowed for your purchase.
- As time goes by, you are not paying off anything to the amount you borrowed, and at the end of the loan term, you will still owe the same amount you borrowed.
- Most lenders will want to know how you plan to pay off the balance of your loan, such as through savings, investments or selling the property.
- The downside to this type of mortgage is that, while your monthly payments will be lower, you'll end up paying much more interest in the long run.
Exclusive mortgage deals
There are many mortgage deals that aren’t advertised on the High Street but could be ideal for your needs. The good news? We have access to a wide range of exclusive mortgage deals that may be perfect for you.
- If you'd like to explore your options or get expert advice, we're here to help.
Use our Frankly Calculators
Repayment Calculator
Thinking about your next mortgage? Use our Frankly repayment calculator to find out what your repayments could be, based on your loan amount, the desired term of your mortgage, and an indicative interest rate.
Stamp Duty Calculator
Stamp Duty, otherwise known as Stamp Duty Land Tax (SDLT), is the tax you pay when you buy property in the UK. You can use our Stamp Duty calculator to figure out what you’ll pay on your purchase (applies to houses, flats and land).
Are interest only mortgages common?
Interest only mortgages are now far less common than they were and are typically only offered in specific circumstances, such as:
- Buy-to-let properties where owners can use the rental income to cover mortgage payments and build up a repayment plan.
- Later-life mortgages where the borrower's replayment plan is likely to be selling the property at the end of their mortgage term.
The nature of interest only mortgages means that borrowers are relying on being able to use savings, investments or the property itself to pay back the amount they originally borrowed.
Important considerations for interest only mortgages
Interest only mortgages come with some good benefits, but also some downsides that, as a homeowner, could cause you issues in the future. We encourage you to think carefully before choosing an interest only mortgage for your residential purchase.
- Don't get too focused on the lower monthly payments. Calculate how much you’ll need to save to pay off the mortgage at the end of the term.
- Explore whether switching to a repayment mortgage later on would be affordable, and how you would manage the increased monthly payments.
- If you haven’t saved enough throughout the term of your loan, you may need to sell the property to repay the debt.
- If house prices fall, you could end up owing more than the property is worth, which is known as negative equity.
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