How are monthly mortgage payments calculated?

The amount of money you borrow as a mortgage depends on the size of your deposit. While providers are once again offering 95 percent mortgages, the bigger your deposit, the less money you will have to borrow (and pay back).

Mortgages are paid off in monthly instalments. How much those payments are depends on several factors.

Firstly, the type of mortgage you’ve secured. Most people take out a ‘repayment’ mortgage, which means you pay off the capital – the money you owe – plus interest.

The second type is the ‘interest-only’ mortgage, where you pay just the interest on the loan, and then the original capital at the end of the mortgage term. An interest-only mortgage will mean smaller monthly repayments. However, you will need to be able to finance the full repayment of the capital at the end of the mortgage term and provide evidence of your chosen repayment vehicle to the lender before the mortgage is agreed. Some lenders also part repayment and part interest-only mortgages. Your Charles Cameron Adviser can explain this in more detail.

If you’ve got a repayment mortgage, your monthly payments are dictated by a) the interest rate and b) the length of the mortgage term.

To reduce your monthly repayments when your current deal ends, you can either try to secure a lower interest rate or if your circumstances have changed it could be an option to increase the length of the entire mortgage term. Though this would mean you would pay more in the long run as you would be paying more interest. Your mortgage adviser will assess your circumstances and make a recommendation that best suits your needs.

Another factor that would impact monthly payments is taking out a ‘mortgage holiday’.

This means you speak to your mortgage provider and agree to pause making payments on the mortgage for a set amount of time – something that can be useful when cash is tight: say if you’ve lost your job or you’re expecting a baby. Not all lenders will offer this, and some will only provide the service if you have paid off part of the debt or have previously made overpayments on your mortgage.

One thing to bear in mind; when you begin paying again, your monthly payments will be higher than before the ‘holiday’ as the missed payments will be rolled up and added to your loan, though the amount is not likely to be significantly higher.

As providers offer different interest rates for different mortgage products, navigating the market is best done through expert support. That’s where our independent mortgage advisors at Charles Cameron & Associates will help, assessing the market for the right mortgage deals for your situation and ensuring that the monthly payments are right for your financial needs.