Repayment Mortgage
Mortgage options
A repayment mortgage is the traditional type of mortgage which actually means you own the property guaranteed when you have completed the mortgage term provided you have paid the loan.
The way a repayment debt is divided into capital repayments of the actual amount you borrowed and interest payments which is the total amount of interest the lender is charging you to borrow the money.
As you pay the agreed amount each month you are gradually paying off some of the capital you borrowed and some of the interest until the full debt is repaid.
Because the way in which repayment loan is structured you mostly pay off the interest in the early years and this is the vast majority of the loan its only when the interest reduces to a certain level will you start to see any real reduction in the capital amount.
As the years go by you will see a shift from paying off the interest to paying off the capital amount. This type of mortgage will appear to be more expensive than other types which are only interest only repayment mortgages. The repayment mortgage will appear to cost you more each month as you are paying off the capital as well as the interest.
Repayment mortgages have one massive advantage over interest-only or endowment mortgages. Once the mortgage term is complete and you have paid installments, you are guaranteed to own your property outright. There can be NO risk of not being able to pay off the mortgage with an endowment or insurance policy.
Unlike endowment mortgages or interest only mortgages you can be assured that the capital is repaid and your debt is fully paid up. A repayment mortgage will cost more in terms of monthly installments but if you can manage it then it’s the safest way to guarantee the loan is repaid at the end of the term. A repayment mortgage is ‘pay as you go’ capital repayment.
If you took the example of 2 people a Mrs Repayment and a Mrs Interest Only who both have identical houses who paid the same price after a period of time say 10 years they both want to move houses and they both have identical income. Who would have the most money to spend on a new home; Mrs Repayment would as she would have paid off some of the capital of the loan whereas Mrs Interest only had not.
In the short term under 5 years you are unlikely to make any significant reductions on the capital amount of the loan, over longer periods the repayment mortgage really starts to kick in.
You should always seek advice from your independent mortgage advisor before committing your self to your repayment mortgage.
