When considering taking out a mortgage, the way the money borrowed will be repaid needs careful consideration. In most cases the borrower will probably want, eventually, to own their home outright. As it is usually the surest way of repaying a mortgage in full within a set term, a repayment mortgage is the most popular type of mortgage available on the market.
What is a Repayment Mortgage?
Repayment mortgages offer a guarantee that the mortgage will be repaid at the end of a set term as long as payments are fully maintained. With a repayment mortgage, a regular monthly payment will cover a percentage of the original loan for the property and any additional interest incurred from borrowing money. Provided that every monthly payment is met, the sum of money borrowed from a lender will be reduced until eventually the mortgage is repaid in full, with the interest and loan repaid and the borrower owning the property outright. This is known as mortgage redemption.
Generally at the beginning of a mortgage term, monthly payments will be made up of more interest, whereas only a small amount of capital is paid for quite some time. As time goes on, the balance switches so that an increasing amount of the capital is paid off each month. The repayment amount is designed to remain the same through the mortgage term (as long as interest rates stay static), though it may increase or decrease if repayment mortgage rates change.
Advantages of Repayment Mortgages
Though there are different sorts of mortgages, repayment types have traditionally worked well for people who want to own their house outright. If the borrower wishes to own their home at the end of the mortgage, and does not wish to rely on investments or other sources of income to fund the home purchase, it is always advisable to choose a repayment mortgage where possible: unlike interest only mortgages, in which only the interest is repaid during the mortgage term, there are few risks involved and if the borrower makes all repayments on time it is guaranteed the loan will be fully repaid. This can also make it easier to get a more competitive deal in the future. As the amount of capital borrowed falls over time, if the borrower decides to switch mortgages after a few years, a more competitive repayment mortgage rate may be secured.
Disadvantages of Repayment Mortgages
One disadvantage of such repayment mortgages, however, is that the monthly payments will be higher than those on an interest only basis, meaning the person taking out the mortgage may initially struggle if they have little saved up.
A repayment mortgage calculator is therefore an easy way of assessing whether you can afford the monthly repayments. This is done by entering the amount needed to borrow, the intended mortgage term, and the lender’s interest rate. The monthly figures given on these repayment mortgage calculators are only intended as a guide before contacting mortgage lenders.
Buy To Let Repayment Mortgages
Specifically for landlords, one option for them is to acquire a buy to let repayment mortgage. These are similar to residential repayment mortgages in that both the interest and the capital are paid. One particular benefit of buy to let mortgages is that borrowers will begin to increase their equity straight away, which will help sustain the future of the investment in the long term. Nevertheless, those with a large number of properties may find this mortgage unsuitable because the capital repayments will leave them with less money to invest in more properties.