When applying for a mortgage you will need to tell the lender how you intend to repay it.
There are 2 options:
- Repayment mortgage
- Interest only mortgage
Here we will look at repayment mortgages which are also known as capital and interest mortgages. What they are and how they work.
What is a repayment mortgage?
With a repayment mortgage you repay the amount borrowed (the capital) plus the interest over the mortgage term. Each month you pay interest and some of the capital off.
How do they work?
The repayment of your mortgage is calculated over the term you have chosen (ie 25 years).
The lender works out how much interest and how much capital you need to pay to keep on track. In the beginning you won’t be paying much capital off but after a few years this changes so that more of the monthly payment going towards paying back the debt.
This is combined into one monthly payment by your lender.
So as each year of the mortgage term passes your outstanding mortgage amount gradually reduces.
The chart below shows how the mortgage balance changes each year.
According to the 2019-2020 English Housing Survey,
of homeowner mortgages were on a repayment basis.
Capital and interest repayment mortgages are chosen by the majority of people applying for residential mortgages.
The monthly cost is more than an interest only mortgage but you always know that you mortgage will be repaid on time.
Here’s a quick example showing the different monthly payments for the same initial mortgage.
£200,000 borrowed over 25 years at 3.50%
|Repayment method||Monthly payment|
Advantages and disadvantages of repayment
The overriding advantage is that your mortgage is being paid back, month by month.
Each year your annual mortgage statement will show the balance decreasing. This happens quite slowly in the first few years and gradually speeds up.
The main disadvantage is that the monthly payments are higher than an interest only mortgage and the lender will be expecting the full amount. So it is a more rigid type of mortgage but most people accept this as it provides certainty of repayment.
It is possible to combine a repayment mortgage with an interest only mortgage, this is known as ‘part and part’.
£100,000 – Interest only
£100,000 – Repayment
£200,000 – Total mortgage
Read more: Part and part mortgages explained.
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