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Mortgage Advisor & Director
How is mortgage interest calculated?
In simple terms, the mortgage interest rate is how much your lender is charging for you to borrow money.
Once you secure your mortgage, the lender will lend you a certain amount of money, and over time they want to earn interest on that loan.
The interest rate is how much they charge for this service, usually expressed as an annual percentage. The interest rate you're offered can vary depending on factors such as your credit score, the Loan to Value (LTV) and other factors, for example, whether or not you're self-employed.
Mortgage amortisation
The amount of interest you'll pay is calculated on a monthly basis, and for this reason, it's natural to assume that your monthly repayments reduce along with the total loan amount.
However, this is not the case due to mortgage amortisation. This means that the mortgage lender applies the same monthly repayments over the term, with a larger portion going towards interest payments at the beginning compared to later on.
How is the mortgage rate different to APR?
Many people are surprised to learn that the mortgage interest rate they're offered is different to the annual percentage rate (APR), which includes other charges such as fees applied to the loan.
How do overpayments affect mortgage interest?
The best approach to paying off your mortgage is to make regular overpayments and pay back the total loan as quickly as possible - within the limits of your mortgage agreement. In the long term, this will give you more flexibility regarding your financial decisions in the future.
Many people choose to make additional payments on their mortgage each month. The benefit of doing this is that you end up paying far less interest, in the long run, helping you to pay off your mortgage quickly. Once you have cleared your mortgage, any additional money coming in can be used to reduce other debts and help improve your financial situation overall.
Overpaying your mortgage can be done by a set amount or by a percentage of the balance when it is set up. People who choose to pay a greater amount each month will see their mortgage balance decrease by a more significant amount each month, meaning that they save money over the loan's life.
Overpayments and early repayment charges
It's important to note that many mortgages will have a permitted cap on annual overpayments, and you could face a hefty fine if you exceed the allowed percentage.
Another risk of making overpayments is that it reduces your monthly cash flow, and reducing your easy access to funds in the event of an emergency is never a good idea. Make sure you've got other funds set aside in savings.
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Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.
