What is a repayment mortgage?

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.

Your monthly repayment mortgage rates amount to the mortgage term divided by the sum you borrow and total interest payable. If your interest rate is fixed then your repayments will be too, and you'll know exactly how much you owe each month.

However, if you have a variable rate or tracker repayment mortgage the amount you pay back will change month by month, with early payments are still weighted to paying off interest.

Standard criteria (such as your personal credit history and available deposit) determine whether a lender will offer you a mortgage, and set the interest rates you pay.

During the early years of your mortgage, the majority of each monthly payment pays the interest owed. Thereafter the amount of your mortgage (capital) paid off each year increases.

What is the best repayment mortgage?

Good repayment mortgages are invariably seen as those offering the lowest interest rates, as you pay back less overall. However, that isn't the full story.

It can also pay to look at how much of your mortgage you pay off early on, rather than interest. The quicker you make inroads into the mortgage itself, the less likely you are to suffer from negative equity.

Although a shorter term may go hand in hand with the best repayment mortgage deals in terms of interest, picking a shorter term will raise your individual monthly repayments. Before you look at shortening your mortgage term in this way you need to check that you will be able to meet the increased monthly payments.

However, assuming you make all of your monthly contributions in full, the mortgage is guaranteed to be paid by the end of the arranged term.

The best repayment mortgage for you will be unique to your personal circumstances and financial needs.

What are the alternatives?

Interest only or investment mortgages are the main alternative, although they can be a riskier choice.

With this type of mortgage you don't pay off any of the amount borrowed until the end of the term, you only pay interest throughout this period. This means that the monthly repayments are lower, although you need to have a plan to be able to pay the balance at the end of the mortgage.

In most cases an investment is taken out at the same time as an interest only mortgage which is used to pay off the outstanding balance at the end of the term.

Advantages of repayment mortgages

  • 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 stock market.

  • 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 repaid increases you will see an increase in the level of equity in your property - its value compared to the amount owed on it. Consequently, if 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 of repayment mortgages

  • You would be unable to benefit from the stock market if it performs well over the mortgage term. 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.

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