Sarah Poynton-Ryan 0:01
Money matters. I wish that I knew tall when I was an investor, a business owner and a money educator, understand it better compound international budget investment to recover from debt. No one explained to me that your money to align us at work is about normalizing the conversation. I Welcome

to the Money Mechanics Podcast. I'm Sarah Poynton, investor, business owner and money educator, and in this episode, we are going to be talking about mortgages. So this actually came in as a question from one of our listeners, what is the difference between an interest only mortgage and a repayment mortgage? And actually, it's something that I absolutely take for granted, because I've bought and sold houses for nearly a decade, but in fact, slightly longer than that, since 2007 which is when I bought my first property. So this is something that comes into my life all day, every day, and I'd taken for granted that actually, people that haven't ever bought a house don't always know the difference between what interest only means, what the repercussions of interest only means, and what repayment means and what the differences are. So I thought actually, let's do an episode on this to just explain the differences and let you have all the information you need to make an educated decision as to which one's going to which one's going to be the right one for you. So what is a mortgage? First of all, now, I talk about this a lot in the book mortgage, if you go right back in history to what it really means, translated, it means death pledge, Mort Gage, death pledge. Now a death pledge means a lifelong commitment, a lifelong debt. Move forward to 2024 what a mortgage actually means. It is a, usually a 25 to 30 year loan for buying your residential property. Now you can always also get mortgages for buy to let property as well. So if you're an investor that wants to buy houses and rent them out, you would get a buy to let mortgage. But for most of you who are getting started in property, really getting on the housing ladder is the first step. So it's that mortgage on your first property. It is going to be the one thing that you pay for most of your life. It's the one debt that runs for a big, big chunk of your life. And yet, we actually do thrive on being on the housing ladder. We want to own property, we want to have a mortgage. It's really hard to get a mortgage, though, if you haven't got one. And you know, the more the cost of living goes up, the more that interest rates go up, though, the harder it is becoming. So there's two different ways that you can get mortgages, and often what happens is, in order to get access to a mortgage, people start with an interest only mortgage, because with an interest only mortgage, instead of paying the actual debt, all you're doing is servicing the loan. So you are paying the borrowing cost of your loan. You're paying the interest only so the interest we on in the last episode, we talked a lot about what an interest rate was, what the Bank of England interest rate is, and what that actually means to you. So if you haven't listened to that, make sure you get your ears around that episode, because it will help you understand it a lot deeper. So a mortgage, an interest only mortgage, means that you, let's say you've borrowed 200,000 pounds, you will have an interest rate attached to that loan. When you get an interest only mortgage and you're paying your monthly payments, that payment is going to servicing the interest rate only. You're not actually paying back that 200,000 pounds initial debt that you've got. So for 25 years, you pay interest only, or 30 years you pay your interest only. The problem that people have with this is they get to the end of that 30 years, and because they've only ever paid the interest and not the capital the actual debt, they still owe 200,000 pounds at the end of that loan period. And actually, this is happening a lot in our market, where people didn't necessarily understand that and realize that they're getting to the end of their products, and they're having to find big chunks of money or sell their homes to be able to repay their loans. So an interest only mortgage is for the entire term that you are paying. You are only renting the money, right? You are paying rent on having that money, that asset, that property that you've bought with that loan still belongs entirely, 100% to the bank, right? So the difference between that and a repayment mortgage is that with a repayment mortgage, the payment that you pay every single month, a big percentage of that goes to your interest, and a small percentage of that goes to repaying the actual loan. So let's say the same 200,000 pounds loan that you've got to get your property your interest, which is the cost of the borrowing. You pay that, and you also pay down some of that 200,000 so when. Get to the end of your 25 years, or your 30 years, you've paid all your interest, you've serviced the debt, and you've paid back a loan of 200,000 which means on the end of your product, you've got the keys to a house that you own 100% you are what's called mortgage free at that point. Now, a lot of people have a goal in their life, to become mortgage free. There's different schools of thought on this. So for some people, actually, and I talk about this a lot in the book, so you should definitely grab a copy of the book and read the chapter on leveraging other people's money. It's not for this episode. We'll talk about it on another episode at some point in the future, but there's a chapter on this in the book. So people want to be mortgage free, but what actually happens when you're mortgage free is you've got 200,000 pounds of your money, your equity tied up in bricks. You can't really do much with it. So what happens a lot of the time is we refinance property and we move our money around so that we can do different things. But like I say, it's not really for now. It's not really for this episode. Read the chapter in the book on leveraging so coming back to the main differences between interest only and repayment mortgages, interest only usually has lower monthly payments, which is why so many people choose it when they're getting on the housing ladder at the beginning, because it is more accessible, right? Because you're paying just one part of it and not the capital debt, it means that your monthly payments are going to be way less. With a repayment, you're going to have higher monthly payments because you're paying both the interest and the debt right now at the end of the mortgage, again, this is really important detail. At the end of the mortgage, on an interest only, you still have to find the money to clear the debt with a repayment you own the house completely. Now, one of the things I definitely suggest that people listening to this podcast do is speak to their parents about whether they are on interest only or repayment mortgages, because I know I've worked with clients before that have said to me, Well, we always thought that we would inherit our parents house because, you know, they pay their mortgage, they're paying it down, and we've been told we'll inherit it, but they've misunderstood, and actually what's happened is they've got to the end of the term. They've been paying interest only. They haven't had enough money to clear the debt, and they've had to sell the home to be able to repay the bank. That means there's no inheritance left. Now that it doesn't happen often, but it's definitely happened, and I've definitely spoke to clients about it. So you know it. To some people, it might seem obvious that you actually, you know, you understand this stuff, but to others, it's not so obvious. So just check in. Check. Speak to your parents. Just check which is which. Now there's pros and cons to both. Of course, you have to decide what is going to make sense to you. So, you know, lower monthly payments means it keeps your costs down, but the higher monthly payments, the repayment is going to give you a bit more flexibility in the rates that you're going to get the borrowers that are available to you. You know, there's all these different pros and cons to it. I think with interest only, the benefit is you can make your money go further. So actually, let's say that your your repayment mortgage would be 800 pound a month, and your interest only mortgage would be 500 pound a month. Well, that difference of 300 pounds a month. You know, you could invest that into other things. You could maybe invest that into the stock market or a fund or, you know, something else completely. It gives you the ability to diversify a little bit more because you're only paying a smaller amount each month. But actually, if what you want to do is be left with a house at the end of it, and that's your strategy, that's your investment plan, you need to make sure you pick repayment, because that's what's going to create your wealth over time. Right now, choosing a mortgage that's right for you, I've just written a couple of notes on here to really help you to figure this out. I'm not a mortgage broker. There are exceptional specialists in this category. What I'd say when you're looking at picking a broker is you want to work with somebody who's got access to the whole of the market. Now, when you go to Barclays or Santander or TSB they are going to offer you Barclays or Santander or TSB products. What they're not going to do is look at the whole of the market and say, well, actually, if you went with a another lender, you'd be able to get lower payments. The interest rates have a little bit lower you can get a slightly extended term. There's no arrangement fee. The penalties are less. They'll be able to help you and really advise you properly. If you bank with HSBC, you don't have to go to HSBC to apply for your mortgage. And I hear this a lot, where people say, Well, I just went to TSB, because I bank with TSB, and they said that this is the mortgage that's available to me, so that's the one I went with. I would absolutely recommend that everybody gets a broker, but can represent them and go and find the right lender for them. And if anyone needs an introduction to a broker, by the way, just. Drop me a comment, send me a message wherever I'll send you the details of my broker, who's Excellent. Having a broker that can help you find the right mortgage for you is really, really important.

You can say to them, Look, what we want is low payments. We want to be able to spread our money. We want to be able to have that plan in place, to have that loan paid off at the end. How do we do that? And they can help you, or you could say to them, Do you know what? We're actually happy with higher payments. I don't have to worry about thinking about where the money is going to come from. We just want repayment. They'll be able to go out and find the right product for you. So I'd recommend highly that you go and get yourselves a really good broker. Now, with brokers, sometimes you have to pay in advance for a broker, and sometimes you pay at the end. There's no right or wrong. It just depends on how they run their business. In my experience, brokers that I've paid at the beginning tend to work harder for me. That's not to say that brokers, you get paid at the end, don't work hard. They do. It's just what my personal experience has been. You need to figure out what works for you, but there's, you know, often people, I get messages saying, is it a scam, if my broker is asking for a fee up front? Absolutely not. That just might be their business model that, you know, being a broker has a lot of work. They have to do a lot of due diligence on you. They have to do a lot of digging around in the market. They have to do research. There's loads and loads of work that goes into it. Some like to be paid in advance for that. So they definitely get paid. You know, they might have staff to pay offices to pay for stuff like that, and some of them don't necessarily do that, but find the one that works for you, and then I think the key to this is looking at all of the options and working out what is going to be in the long term. The best solution for you. What I can also tell you is that when you pick a mortgage today, we're talking about 2530, year products, but it's usually tied in for the first 235, years. You're not usually tied in for 30 years. So after the first couple of years, as the market moves around and interest rates change and the value of your property changes and your circumstances change, you might get a quid, you know, pay rises. You might end up moving in with a partner. There's all different things that happen at each chapter of your life. You can refinance your properties. So you can say, well, you know, five years later, you bought a house today, you got the product was right for you today, five years down the line, you might be earning more. You might be living with somebody else. You might have kids. Now, you know, it's all different things that go on. You find the products right for you then. And what you do is you refinance. It's called remortgaging refinancing, where you get a different loan, which pays the loan off that you've got currently. And you move from, let's say, Santander, who's your original loan. You move from sand down there to Barclays. You utilize the loan from Barclays to pay back the loan, and you're now on a new product with different rates, different monthly payments. And it's really important, regardless of whether you've got interest only or repayment, that you keep an eye on the dates, because in the first instance, what will happen is you'll go on like a usually a fixed rate, for a period of time, and then it will go on to a variable tracker rate. And the variable part is where it's unpredictable, and you don't really know what you're going to be paying, because it tracks the Bank of England base rate, which we talked in in last in the last episode. So to conclude this, you need to find a broker, work out what you want long term, whether you want to be left with the keys to a house that you own fully, or whether actually you just want to service the debt and have a house at the end that you give back to the bank because they own it. You don't have to give it back to the bank, because you can refinance. As you move things forward, you need to decide what's right for you right now, what's right for you for the next couple of years, and then you can look to change that over time. My name is Sarah Poynton, this has been the Money Mechanics podcast. If you're watching over on YouTube, please make sure you subscribe and hit the like button. It helps me to spread the word. If you're listening on audio, only make sure you leave me a five star review so that we can spread the word over here as well. I've been Sarah Poynton, thanks for listening. You.

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