Repayment Mortgage
There are many different types of mortgage available today yet
Repayment Mortgages remain the most common type of mortgage. Repayment
mortgages are seen as the more ‘traditional’ type of
mortgage and remain the only way the property is actually guaranteed
to be yours at the end of the mortgage term (provided you have repaid
the loan).
Recommeneded Repayment Mortgages:
With a repayment mortgage, your mortgage debt is divided into capital
repayments and interest payments. Capital repayments are the repayment
of the money you actually borrowed, whereas interest payments are
simply paying off the interest that the lender has charged you for
borrowing their money. Every month your mortgage repayments will
consists of capital and interest, you pay a bit of each off until
the full debt is repaid (hence a repayment mortgage is often referred
to as a ‘Capital and Interest’ mortgage). This does
mean that the repayments for a repayment mortgage are often larger
than other types of mortgage because you are paying both interest
and capital with each monthly payment.
During the early years of a repayment mortgage your repayments will
be paying off mostly interest, and then gradually more of the capital.
Hence if you decide to see up in the early years you’ll find
you’ve hardly paid off any capital at all as over the initial
years the capital will not reduce very much as most of your payment
goes towards interest payments. As the years proceed, more and more
of the monthly repayment will be applied to reducing the capital
until towards the end of the term the large proportion will be paying
off capital and a small proportion paying interest. Over time the
capital decreases in size thereby reducing the amount of interest
payable, so more of your payments can be channelled into paying
capital.
The main benefit of a repayment mortgage is that you can be sure
your debt will be cleared by the end of the term providing you maintain
the repayments throughout. Repayments are the simplest type of mortgage
– you borrow money and you pay it back in instalments. A repayment
mortgage also removes the risk of having an investment – the
performance of which depends on the stock market. However if interest
rates rise then your monthly repayments may rise accordingly but
if interest rates fall then the reverse applies.
The lender will also usually require you to take out life insurance
before you are approved for a repayment mortgage so that they are
safe in the knowledge that repayment of the mortgage is made in
the event of the borrower’s death during the term (although
this does depend on the lender, life insurance is not always required).
Advantages of a repayment mortgage:
- You can be certain that all debt will be cleared at the
end of the term, as long as you maintain your repayments.
- You will be less affected by fluctuations in the stock
market.
- Overpayments and lump sum payments into your mortgage account
can usually be made, reducing both the interest and capital amounts
repayable.
- At the end of the mortgage term, you will own 100% of the
property.
- Many lenders now offer flexible repayment mortgages so
you can pay more than the prescribed monthly amount when you can
afford to and take payment holidays when you can’t.
Disadvantages of a repayment mortgage:
- There may be financial penalties for making lump sum/overpayments
into your mortgage account (check with the lender before you agree
to the mortgage).
- If you have no life assurance cover in place and die before
the loan is repaid, the mortgage will still need to be repaid which
may result in the property having to be sold to repay the debt owed.
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