Repayment Mortgages

With repayment mortgages the monthly payments to the lender comprise an element of interest charged and an element of capital repayment.

A repayment mortgage is a term generally used to describe a mortgage in which the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest. The mortgage statement, usually received annually, shows the amount borrowed decreases throughout the term.

The big advantage of a repayment mortgage is that at the end of the mortgage term, the full amount of the debt has been repaid. It also removes the risk of having an investment, the performance of which is dependent on the stockmarket. The borrower is less likely to suffer from negative equity because the mortgage balance will be reducing month on month.

As time moves on, the equity percentage in the property increases. However, in the early years the bulk of the mortgage repayments consist of the interest component, so not much of the capital is actually paid off for some time.

As long as all the repayments are made on time, repayment mortgages are guaranteed to be repaid at the end of the term.

Repayment mortgages are also known as “capital and interest mortgages.”

During the term of the loan the monthly payments made to the lender comprise both an interest portion and a capital repayment portion. At the beginning of the term the interest portion is high and the capital portion low.

Over time the interest portion diminishes and the amount of capital repaid increases. At the end of the term of the repayment Mortgage, the capital portion should be fully repaid.

Repayment mortgages are less risky than interest only mortgages because there will be no outstanding balance at the end of the term. Borrowers will therefore not be required to establish a separate Capital Repayment Vehicle (CRV) such as an endowment policy.

Home owners with repayment mortgages are also less likely to suffer from negative equity because they will be constantly decreasing the capital portion of their loan.

Regardless of the reduced risk, it is wise to take out a decreasing term assurance policy during the term of the repayment mortgage in which the sum assured reduces roughly in line with the reducing Mortgage balance. This will insure that the balance of the loan is repaid upon death of the borrower.

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