What you need to know about repayment mortgages.
With a repayment mortgage, also known as a capital repayment mortgage, you make monthly payments which contribute towards the total amount borrowed and the interest payable. Repayment mortgages are repaid over a specified period. Assuming you continue to make all your monthly contributions in full, the mortgage is guaranteed to be paid off in full at the end of the arranged mortgage term.
During the early years of the mortgage, the majority of each monthly payment goes towards paying the interest owed. The amount paid off each year increases as the mortgage term progresses.
Advantages
- Provided that you make all the required monthly mortgage payments, you are guaranteed to pay off your mortgage in full by the end of the repayment period.
- It removes the risk of having an investment, the performance of which is dependent on the stockmarket.
- You are less likely to suffer from negative equity because your mortgage balance will be reducing month on month.
- Assuming your property has not dropped in value, as the capital repayed increases you will see an increase in the level of equity in your property. Consequently, when you remortgage or move home you may find it easier to obtain a mortgage and you may be able to avoid paying a Mortgage Indemnity Guarantee.
Disadvantages
- You would be unable to benefit from the stockmarket if it has performed well over the period of the mortgage. Therefore, there is no possibility of being able to pay off your mortgage early or receiving an additional lump sum at the end of the repayment period.
- Because very little of the amount borrowed is paid off in the early years of the mortgage, if you were to move again in those early years it is likely that you would need to take out a new 20/25 year repayment mortgage, in order to make monthly repayment amounts manageable. i.e. the period for paying off your debt could be extended.
NB This information is provided to give you an overview of the different types of mortgages available. It is not comprehensive and you should not base your mortgage decision on the information found here. We recommend you seek professional advice in order to determine the most suitable mortgage for you.
