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Compare mortgages that let you pay off the amount borrowed and the interest at the same time. Repayment mortgages ensure there's nothing left to pay once the mortgage term is over.

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What is a repayment mortgage?

When you borrow money to buy a house, you typically take out a mortgage. There are various kinds, but a repayment mortgage is the most common. This is when you pay back the total amount of capital borrowed alongside any interest over the full term of the loan. This means that once the mortgage is paid in full, you own the property outright.

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How does a repayment mortgage work?

When you take out a repayment mortgage, you agree to repay the money you’ve borrowed and the interest accrued over a set number of years – known as the “term”. It’s possible to get mortgages of all sorts of lengths, but 25 years is the most common. 

You agree in advance how the interest is calculated. This could be at a fixed rate, where your monthly repayments are set in stone for a period of time, or a variable rate where the interest follows another indicator such as the Bank of England base rate.

The total amount borrowed – known as the “capital” – together with the agreed term and interest rate is used to determine your monthly payments. Every repayment then clears a portion of the loan’s balance and some of the interest. The amount is calculated so that you pay off the full amount owed, including interest, by the end of the mortgage term.

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Types of repayment mortgage

The interest rate is one of the most important factors when choosing a mortgage because it makes a massive difference to how much the mortgage costs overall. Typically, you’ll need to decide between a fixed or variable interest rate on your mortgage.

Fixed-rate repayment mortgage

With this type of mortgage, your interest rate and your monthly repayments are fixed for a set period, usually two, three, five or ten years. For example, your mortgage rate could be fixed at 2% for three years. 

The advantage of this is that you are sheltered from any interest rate rises and know exactly what your mortgage costs will be for the duration of the deal. For many people, this security and ability to plan is extremely valuable.

The downside of fixed-rate mortgages is that their interest rates are often higher than variable-rate options and if the rates fall you won’t benefit. There are also often early repayment fees, meaning you might be charged extra if you want to overpay your mortgage or if you need to get out of your deal early.

Variable-rate repayment mortgage

With a variable mortgage, your interest rate and repayments can change month by month. Variable-rate deals often track another financial indicator, most commonly the Bank of England base rate. If the indicator goes down, your payments will drop, but if it rises then you have to pay more each month.

The advantage of this type of mortgage is that it usually starts off cheaper than a fixed-rate loan and when the base rate falls you often end up with a very good deal. 

However, the downsides are that you have less security and your payments could increase rapidly. You need to be sure you can afford the repayments if rates rise, so it’s important to do some calculations if you’re considering this sort of deal.

What’s the difference between repayment and interest-only mortgages? 

Unlike a repayment mortgage, with interest-only mortgages your monthly repayments only go towards paying off the interest on your mortgage: they don’t clear the balance of the money you borrowed (the remaining capital). Instead, you have to repay this sum at the end of your term. You can do this by using a repayment vehicle such as a savings plan (such as an ISA or investment fund) or by using a lump sum (perhaps gifted as an inheritance). Interest-only mortgages tend to be less common these days, except for specific products like buy-to-let mortgages.

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