What is a Repayment Mortgage? What is Interest Only?

Article Category: Finance  |   

Whether you are considering taking out a new mortgage, swapping mortgages to another lender, or mortgage re-financing, there are two main types of mortgage to consider. Both have their benefits and drawbacks. Here is a summary of each of them.

What is a capital & repayment mortgage?

A capital and repayment mortgage is a secured loan that is divided up into repayments of the money you borrowed (capital repayment) and payments of interest charges for the loan (interest payments).

investing money in a house - photo

So, with every regular monthly payment you are repaying some of the capital and some interest. Providing that you have kept up payments, by the end of the mortgage term the property is guaranteed to be yours.

Early on, the percentage divide between capital payment and interest is more weighted towards the interest. You will notice on your statements, for example, that your capital balance reduces quite slowly in comparison to the money you are paying. However, as the capital balance reduces, so the split changes. This means that towards the end of the loan your capital payment will make up a bigger slice of the payments than the interest.

For more information on mortgages and savings, you are recommended to speak to an independent financial advisor.

What is an interest only mortgage?

An interest only mortgage is a secured loan in which the monthly payments include only the interest on your loan. So, at the end of your mortgage term the balance of the initial value of the loan is still outstanding.

interest only mortgage - photo

The advantage of this idea is that your monthly payments will be much lower than for a repayment mortgage. However, the disadvantage is that, because you are not paying off capital during the mortgage term, you will still owe the original amount of the loan at the end of the term. If you cannot repay this amount in full, your mortgage lender has the right to repossess your home. You may, therefore, wish to consider putting in place some kind of savings system along the way so that you can pay off the capital debt at the end. Most mortgage providers will insist that some repayment vehicle is evident before offering the mortgage.

If you decide on this option, you should bear in mind that the value of your property may rise or fall during the term of the mortgage. If your property value decreases over the period of your loan, and you are intending to sell it at the end to pay off the capital amount, then you may end up with a deficit (negative equity).

For more information on mortgages and savings, you are recommended to speak to an independent financial advisor.

If you wish to compare calculations of a capital & repayment mortgage with an interest only mortgage, why not use our free mortgage calculator tool ?

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Last update: 08 April 2009

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