In simplest terms a repayment mortgage is a defined schedule of monthly payments to the lender whereby the whole mortgage or borrowing is fully paid at the end of the agreed term.
Repayment mortgages explained
As the name suggests a repayment mortgage focuses on paying back the money you have borrowed, i.e. the loan you have taken out for your home purchase. The key structure of a repayment mortgage is based on the following. Firstly, you will agree a period of time over which you intend to pay back the borrowing. The borrowing will be subject to rate of interest. This will vary with lender to lender and also is dependant upon which type of mortgage variation you take out for example a fixed rate mortgage, variable or tracker. Your actual monthly total mortgage payment will incorporate an interest amount and capital payment.
If all variable remain constant throughout the life of your mortgage then you can be expected to ensure that the whole borrowing is fully repaid. Depending on your own personal circumstances this can change should you extend the borrowing period or even switch to an alternative product type such as a interest only mortgage where you are only paying the interest on the borrowing and not making any impact on the capital borrowing.
During the early stages of a repayment mortgage majority of the monthly payments contribute towards the interest payment of the borrowing; therefore you only start to see the total balance reducing further down the repayment model.
Repayment mortgages to suit your lifestyle
Some lenders who offer repayment mortgages have introduced a lot more flexibility in their products that allow the borrower to make monthly overpayments; these are generally capped either on a monthly basis or have an annual overpayment restriction. This level of flexibility can have a major impact on the total amount you actually repay back to the lender as any overpayment will reduce future monthly payments and ultimately pay less interest.
Repayment Mortgages - Key Considerations
Repayment mortgages are one of the most popular mortgage products chosen by consumers probably because most people want to ensure that the borrowing debt is guaranteed to be repaid.
Depending on which type of repayment mortgage you take out your monthly payments could fluctuate if it linked to changes in interest rate levels, therefore it is important to consider the affordability factor when making your decision when choosing your mortgage.
If overpayments are allowed with your chosen mortgage lender then try to take advantage of this feature. Discuss the impact of overpayments and ask your lender how much money you will save.
Keeping up with your mortgage payments is very important. As long as you do so you can ensure your full loan amount is repaid. If your circumstances changes then speak to your mortgage provider, they will be able to offer you a number of alternative mortgage solutions which may including switching over to an alternative product. Some lenders may charge a small fee for switching or changing your mortgage product.
With repayment mortgages as you start to make inroads into the capital repayment of your loan you will begin to build up a level of equity within your property. Obviously, this may not necessarily be the case as this will depend on the market prices of similar properties in your area at the time. Having equity in your property can also open up many other opportunities such as equity release for alternative uses.
How do I apply for a repayment mortgage?
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