A guide to re-payment rates for your mortgage
Full re-payment
A repayment mortgage is probably the most common mortgage taken out. It really needs no explanation as the title basically says it all; you borrow money, you repay the money you borrowed. A repayment mortgage really is as simple as that. Its a uncomplicated interest mortgage where each month you pay the agreed interest set by the interest rate given at the time of the loan as well as paying back to a portion of the money that you have borrowed. A repayment mortgage is repaid over a set number of years (normally up to and over 25). At the end of the mortgage, all the interest and the money you borrowed has been repaid to the lender. The advantage of this type of mortgage is that it is simple and guarantees that, providing all the correct repayments are made on their due dates, the mortgage will be paid off, in full, at the end of the agreed term.
The main disadvantage of this type of arrangement relates to the way that the interest is calculated and collected. In the early years of your mortgage the majority of your monthly payment will represent the interest being charged with only a small part going towards a reduction in the outstanding debt. This means that the amount you owe reduces very slowly in the early years with the majority of the capital being repaid in the last few.
This type of mortgage is very flexible and does allow you the option to increase your repayments at any time with a view to shortening your mortgage term.
Interest only mortgage
Interest only mortgages are becoming more and more popular as house prices are rising and people can sometimes only afford to pay off the interest accrued on the money they are borrowing.
An interest only mortgage is exactly how it sounds, you borrow money and you pay to the lender the interest on the loan for a set period of time (again normally up to and over 25 years). At the end of this period of time the lender has the right to call in the loan and you will be expected to be able to repay the money you originally borrowed.
To do this it is usually necessary to run some kind of investment plan alongside the mortgage with a view to building a cash lump sum which is sufficient to repay the mortgage debt at the end of the term. There are a number of ways in which people do this and these include endowment policies, ISA's and pension plans.