Mortgages > Repayment Mortgage Guide

Mortgages

Repayment Mortgage Guide

With a repayment mortgage the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest. Your mortgage statement, usually received annually, shows the amount borrowed decreases throughout the term.

The main advantage of a repayment mortgage is that at the end of the term, you can be sure that the total amount of the debt has been repaid. It also removes the risk of having an investment, the performance of which is dependent on the stock market. You are less likely to suffer from negative equity because your mortgage balance will be reducing month on month.

Assuming your property has not dropped in value, as the capital re-paid 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.

There are a couple of disadvantages. You would be unable to benefit from the stock market 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 with such an investment windfall or receiving an additional lump sum at the end of the repayment period.

If you move house after a few years, you will often have to repay your existing loan and take out a new one. Since most of the repayments in the early years consist of interest on the existing balance, not a huge amount of capital will have been repaid from the original debt. Many people end up taking out another twenty-five year loan, especially if you are trading up to a higher value property. This once again puts you at the start of the repayment schedule, meaning that the bulk of your repayments are once again being taken up with servicing the interest bill on the mortgage debt.