How much do I end up paying on mortgage?

Understanding the True Cost of a Mortgage: What You’ll Really Pay

Few people have the privilege of buying a house outright in cash, leaving the structured repayment approach of mortgage loans the more manageable solution. If you’re new to the process, you may have wondered ‘How much do I end up paying on a mortgage?’. The true amount you pay back will vary depending on your circumstances, so there’s no one-size-fits-all answer. However, it helps to know what costs go into your mortgage and buying a house, as it doesn’t just involve your monthly repayments but your deposit and the period over which you pay back. In this guide, we explore the components of a mortgage, an example of what you may expect to end up paying and share how to find the most suitable mortgage product for you.

What is a mortgage?

A mortgage is a loan designed to help you buy a house or other property. The basic mortgage structure requires most people to put down a deposit for the property they wish to purchase, which is usually a percentage of the total cost of the property.

The mortgage lender pays for the property, and you enter into a contract with the lender where you will be paying monthly instalments to repay the loan over an agreed term for the house purchase. The house acts as security for the loan, with the mortgage lender handing over the deeds to the house once you clear the instalments (and therefore the mortgage loan) in full.

What impacts how much I end up paying on a mortgage?

There’s a lot more that goes into a mortgage than just the house price and the monthly instalments you pay. Some of the costs surrounding a mortgage include:

Deposit

The larger the deposit you can put down, the less the amount the lender has to loan to you meaning the less you have to pay back. This may in turn lower the interest rate. It also increases confidence in your repayment ability, which helps to reassure mortgage companies.

Repayment term

On average, most people opt for a 25-year pay-off period, but in theory you can pay back over any period, including 30 and 35-year terms. Of course, the longer you have to repay the loan, the more you’ll pay back overall.

For instance, a mortgage on a £200,000 home is going to incur more interest if you pay it back over 25 years than over 20 years, but your monthly repayments will be lower as the cost is spread over a longer timeframe.

Interest rate

The interest rate is what the mortgage lender charges for providing the principal (loan initial capital) amount. A mortgage with a higher rate may mean you’ll pay more back overall than one with a lower rate. Some things which affect the interest you pay on a mortgage include the following:

• Fixed term or variable rate: A fixed rate mortgage has a set interest rate that will not change for a set period of time (such as 2, 3 or 5 years). This means your monthly payments are consistent and predictable. A variable rate mortgage, on the other hand, has an interest rate that can fluctuate with market volatility, meaning your monthly payments can go up or down.
• Loan-to-value ratio (LTV): The loan-to-value ratio (LTV) is expressed as a percentage of the property value compared to the amount you have borrowed. Generally speaking, a lower LTV means you get access to mortgage products with lower interest rates and will pay less interest back over time.
• Economic circumstances: When the economy is prospering, and the rates of repossessions and unemployment are low, the banks have more confidence in lending so may offer mortgages with lower interest rates. When the economy is weak, such as in a recession, or there are high levels of unemployment, banks may see mortgages as more of a risk and charge higher rates on mortgages which can affect the amount you repay overall.

Fees

While not strictly part of your mortgage, you may pay additional fees for some mortgage products or when using certain services. These could include:

• Mortgage product fee: This is a one-time payment that a lender may charge to cover the cost of setting up your mortgage. It usually ranges from £500-2000.
• Mortgage broker fee: This is usually a single payment that covers the cost of having a broker handle your mortgage application.
• Valuation fee: This is a one-time payment that covers the cost of having an appraiser evaluate your property for its value as collateral for a loan.
• Survey fee: This is a fee associated with having a building survey done to inspect the property for any signs of damage.
• Legal fees: These include the costs of having a solicitor and conveyancer handle aspects such as the paperwork and transfer of money.
• Stamp duty: Some buyers may have to pay stamp duty on their purchase if the property value is over a certain amount.

Insurance

When you take out a mortgage, there’s a good chance your mortgage terms will require you to take out buildings insurance. Other recommended insurance costs of having a mortgage include life insurance (which can ensure your repayments are made in the event of death or critical illness) and content insurance (which can protect your belongings).

How much do I end up paying on my mortgage? Example calculations

As we’ve mentioned, your costs will be individual to you and your circumstances, but here are some examples to show how repayments are worked out:

Example 1

House price: £200,000
Deposit: £20,000 (10%)
Loan amount: £180,000 (90% LTV)
Mortgage length: 25 years
Interest rate: 6%
Monthly repayments: £1,160
Total cost of mortgage repayments: £347,923
Total paid in interest: £167,923

Example 2

House price: £250,000
Deposit: £50,000 (20%)
Loan amount: £200,000 (80% LTV)
Mortgage length: 20 years
Interest rate: 4.5%
Monthly repayments: £1,265
Total cost of mortgage repayments: £303,672
Total paid in interest: £103,672

How can I get the most favourable terms?

While you may not be in control of certain variables in a mortgage calculation, there are a few tips to help you secure a more favourable interest rate:

• Save for a larger deposit: Putting down a larger deposit can reduce your LTV ratio so that you benefit from lower interest rates and lower the total amount you have to repay.
• Repay over a shorter period: The faster you’re able to repay the loan, the larger the monthly instalments will be, but the less you’ll end up paying.
• Watch the financial markets: Keeping abreast of the economic circumstances can help you determine when is best to take out a mortgage and how much you’ll expect to pay in interest rates.
• Get tailored advice: Sifting through all offers on the market takes time and skills you likely don’t have. This is when an experienced mortgage broker can talk you through the process, outline the costs and help you find the most suitable mortgage product for your circumstances.

Speak to an advisor today

Mortgage loans vary, depending on your situation and your chosen property. While mortgages are the most manageable option to own a home, they don’t have to be a crushing financial burden. Get in touch today and let us help you pick the most suitable one.

As a mortgage is secured against your home/property it may be repossessed if you do not keep up with the mortgage repayments.