With a repayment mortgage, sometimes referred to
as a capital repayment mortgage, the borrower makes
monthly payments which contribute towards the total sum
borrowed and the interest all payable to the lender.
Repayment mortgages are repaid over a specified
period of years.The mortgage is guaranteed to be paid off
in total at the end of the agreed mortgage term. During
the initial early years of the mortgage term, the majority
of each monthly payment goes towards paying the interest
owed. The amount paid off each year increases as the mortgage
term progresses. Over a typical 25 year term the repayment
can be viewed as follows:
Pros and cons of a repayment mortgage
The Advantages Provided that you do make all the
required monthly mortgage payments, you are guaranteed to
pay off the mortgage in full by the end of the term. It
removes the risk of having an investment, where the performance
of which is dependent on the stockmarket. You are thus less
likely to suffer from the problem of negative equity because
the mortgage balance will be reducing month after month.
If we assume the 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
re-mortgage or move home you may find it easier to obtain
a mortgage and you may be able to avoid paying a Mortgage
Indemnity Guarantee.
The 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.
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