Repayment Methods Explained

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May 10, 2019

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Repayment Methods Explained

Want to know the difference between a Repayment (Capital and Interest) Mortgage and an Interest Only Mortgage, well our jargon buster is perfect to tell you everything you need to know so you  can make the best decision.

Repayment Mortgages

This type of mortgage is the most common mortgage taken today mainly because it is quite difficult to obtain an interest only mortgage.

Capital Repayment mortgages are repaid through your monthly mortgage payment that includes interest charged by the bank and a portion of the capital sum you borrowed.

You will pay more interest in the early years of the mortgage and more capital towards the end of the mortgage.

Advantages

  • Mortgage balance reduces during the mortgage term.
  • Mortgage will be repaid at the end of the term as long as you have made all repayments.
  • You will have more money in the property for a bigger deposit on your next home if you move house.
  • You will have more choice of lenders as some lenders only accept this method or repaying your mortgage.

This type of mortgage can be combined with any of the Interest Rates Types we talk about in this section, this is of course dependent upon the individual lenders allowing this.

Interest Only Mortgage

If you have an Interest Only mortgage, your monthly payment will include the interest charged by your bank on the money you have borrowed. You will usually make a secondary payment into some sort of vehicle which you will use to repay the entire mortgage balance at the end of the term such as savings, preferably through an investment plan. Boosted either by interest or a good rate of return on your investments, your savings should be designed to increase in value over the term of the mortgage, giving you enough money to repay the mortgage debt at the end of the mortgage term.

Advantages

  • Your mortgage repayments will be cheaper.
  • You can use existing savings and assets to repay the mortgage subject to the lenders approval.
  • It could make getting a mortgage in your later years cheaper than a short term repayment mortgage.
  • Some lenders allow you to sell and down size to a smaller property as a means of repaying the mortgage.

There are risks with an Interest Only mortgage with the main risk being that you may not be in a position to repay the mortgage at the end of the term. you should ensure that you review any savings or other assets you plan to use to repay the mortgage to ensure they will have sufficient funds.

If you are in a position now where your mortgage is due to be repaid and you do not have the means to repay it, please call us and one of our adviser will guide you through possible solutions. 01233 512012

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