Repayment mortgages are the most common form of mortgage loans. A repayment mortgage means that you pay both interest payments and capital repayments. At the end of your mortgage term it means you will have paid off your mortgage debt
In the beginning of your mortgage term the majority of your mortgage payments will be paying interest on the debt. Capital repayments will be a small %. However over time the ratio of capital payments increases. Towards the end of your mortgage, as your mortgage loan gets smaller, most of the repayments will be on paying off your capital debt.
Advantages of Repayment Mortgages
- At the end of the mortgage term you will own the house outright and have no further payments to make.
- You do not have to worry about alternative investment schemes such as endowment policies. In the 1980s many with endowment schemes were badly advised meaning they lost money on their investments and struggled to pay off mortgages
- mortgage Payments are less volatile depending on interest rates. If you have an interest only mortgage and interest rates increase, it will cause a bigger % rise in your mortgage payments.
- There are many varieties of repayment mortgages. If you need to reduce your monthly payments you can look into discounted variable rates or extend your mortgage term.
- It makes it easier to buy a more expensive house in the future. With a repayment mortgage you are working towards reducing your mortgage loan. Therefore if you wanted to buy a more expensive house in the future (e.g. if you need more bedrooms) a repayment mortgage reduces your loan. With an interest only mortgage you will never be reducing your mortgage debt, therefore it is more difficult to get a bigger mortgage in the future.
- Peace of Mind. A repayment mortgage enables the house to be your own and you don’t have to worry about generating savings for the future.
Disadvantages of Repayment Mortgages.
- In the short term at least your monthly mortgage payments will be higher than an interest only mortgage. This is because you pay both interest and capital repayments.
For many first time buyers in the UK getting a repayment mortgage may be too expensive. An interest only mortgage may enable them to afford interest payments and therefore get on the property ladder. In the future when incomes increase faster than mortgage payments they can switch back to a repayment mortgage.