Many property buyers in Scotland simply don’t have enough cash sitting around to purchase a property without taking a loan. The most common form of a loan that property buyers in Scotland take is a mortgage. But what are the different types of mortgage: interest only vs. capital repayment, variable rate vs. fixed rate, and what happens if you don’t pay your mortgage?
A mortgage is a loan that is secured against the property that they are purchasing. This means that the borrower agrees that they will forfeit their property to the lender if they fail to repay the mortgage. This is what is commonly referred to as repossessing a property.
The lender makes their money by charging interest over the lifetime of the loan. The length of time varies but is often 25 years, though it can be longer and of course it can be shorter too depending on the borrower’s circumstances. The more quickly you pay the money back, the less you will pay in total. However, the longer you spread out the repayments, the more affordable the repayments are.
Mortgages can be ‘interest only’ or ‘capital repayment’.
Interest only means that you are only paying back interest to the lender on the amount that you have borrowed. This means that after 25 years, for example, you will not have paid back any of the amounts that you borrowed. You will therefore not own your property outright. As a result, you will have to be able to pay that loan back in some other way, for example through savings or through cashing-in another investment or indeed by selling the property that the mortgage has been taken on.
Capital repayment means that every month, you are paying back the interest on the loan but also part of the amount of the loan too. This means that, at the end of the period of the loan, for example at the end of 25 years, you will have paid back the full amount of the loan and you will own the property without any ongoing obligation to the lender.
Interest rates can be variable or fixed, can be based on the Bank of England Base Rate or the individual lender’s Standard Variable Rate, can allow you to pay the money back early or penalise you heavily for selling your property and paying the mortgage back before a certain date, can allow you to offset money in different bank accounts against your mortgage to reduce the amount that you are paying interest on, etc etc etc.
Mortgage options are baffling and it’s best to take professional advice before entering into such an important, long-term and expensive loan. Whatever loan a borrower/property buyer takes will depend entirely on their personal circumstances at the time.